Last update: 17/10/2022
They're a debt instrument public and private entities issue to finance eco-friendly projects. They're a thriving form of sustainable investment.
Sustainable finance has become crucial to initiatives on reducing the devastating effects of the climate crisis. One of its most revered instruments are green bonds, a form of eco-friendly financing issued by public and private entities.
The European Investment Bank (EIB) issued the first green bonds in 2007 in what was a giant leap towards building a responsible banking industry. Since sustainable doesn’t mean unprofitable, many investors are turning to green bonds. Their “eco-friendliness” doesn’t drive up their price.
To understand what they are, we must first get to grips with bonds — financial instruments for long-term liquidity that return investors’ money with interest. They're different from other short-term bonds (like government bonds).
How do green bonds work?
Green bonds' sustainable objectives also set them apart. They finance projects that help reduce the effects of climate change or protect the environment. They fall under the category of ESG (environmental, social and governance) and can benefit investors by offsetting emissions in proportion to their outlay.
But what must a green bond issue consider? The Green Bond Principles help businesses finance sustainable projects in a transparent way and transition to a green economy. Their four components are:
Santander Sustainable Bond issuances
Santander drafted its Global sustainable bonds framework in line with its “Green and Social Bond Principles 2018”, its Responsible banking strategy and its aim to increase funding for sustainable projects.
The framework enables the issue of green, social and sustainable bonds to fund sustainable development and our commitment to more inclusive and sustainable growth.
What type of project can green bonds finance?
Ana has recently paid off her mortgage. With less outgoings, she can now save a lot more. She’s contemplated investing some of her savings for quite some time. However, she’s looking for a responsible investment that generates returns and protects the planet and society.
After checking her options, she pinpoints green bonds and wants to find out more about the projects they could finance if she invested in them. She wonders what green bonds are out there and finds a wealth of them that support:
With all this in mind, Ana now understands the importance of investing in green bonds. She’s doing her part to help achieve UN Sustainable Development Goals (SDGs) 6 (“clean water and sanitation”); 7 (“affordable and clean energy”); 11 ("sustainable cities and communities"); and 13 (“climate action”).
According to the Climate Bonds Initiative (CBI), in 2020 USD 270 billion (EUR 240 billion) were issued in green bonds. This has led to new special bonds, such as blue bonds to benefit marine ecosystems.