A Brief Introduction to Green Bonds
Green bonds have been in high demand since its launch in 2007. People didn’t expect much from it, but its growth since its outstanding growth since its inauguration makes it a worthwhile investment option. Besides the vital environmental projects funded by green bonds, they are also highly beneficial for shareholders.
It is no secret that the world is faced with massive environmental challenges caused by global warming and climate change. It has been a significant reason behind the green bond’s rapid surge in popularity. Bloomberg suggests green bond sales that could be as high as 150 billion Dollars. If you are new to these bonds, it is worth noting that they particularly aim at funding current or new climate-friendly or environmental projects.
They could include funding for clean water supplies, renewable energy, waste management solutions, solar power, and other renewable energy projects. The green bond market began in 2007 after the World Bank and European Investment bank-issued triple-A bonds for the first time. The market took off immediately and has been on a steady incline.
What’s most interesting about green bonds is that their growth comes from the money being invested and the vast geographical presence of green bond markets. The United States, France, and China are arguably the biggest issuers of this bond. However, Nigeria, Lithuania, Chile, Argentina, and various other countries are also stepping up in the green bond landscape.
Hong Kong has been the most recent country to make waves in this market as the country’s government issued a sizeable green bond scheme expected to be worth more than one hundred billion dollars. Malaysia also launched the “green susuk” in 2017, an Islamic variant of the green bond.
Understanding the Criteria
The specifics of the elements constituting a green investment are open to interpretation. However, with a high number of issued bonds, the definition tightens while the market grows substantially. Generally speaking, expecting that these bonds will provide long-term returns according to government issues is reasonable – especially considering that their revenues mostly come from government-sponsored and municipal projects.
Green bonds may initially have subpar performance than the government’s debt because of low liquidity. However, the liquidity will not be a threat later as the number of issued green bonds increases.
What You Should Know Before Investing in Green Bonds
As discussed earlier, investors can take advantage of green bonds to invest in sustainable projects like loans for improving public transport or making real estate more sustainable. Most of you reading this might be wondering how green bonds work.
Well, it starts with an investor purchasing a debt certificate from a company or a bank. It serves as funding for sustainable projects. Investors need to pay fixed interest for this loan. When buying a green bond, almost every institutional investor is aware of their investment’s sustainable impact. A reputable third-party inspects if the loan recipient is using the money transparently.
Consider These Risks before Going Green
You may encounter some detractors while investing in these bonds. Liquidity is one of the biggest issues people encounter after going green. Since this market is in its primitive stages, exiting and entering positions isn’t as straightforward as popular investment options. It would be best to avoid green bonds if you want a liquid investment product.
However, if you are patient and wait until issuances increase, the green bond’s liquidity could improve. Otherwise, you should only choose these bonds if you are ready to hold your investment until it matures. Also, some investors use this financial product for the wrong reasons. Their lack of awareness is one of the main reasons behind this, as the definition of green bonds is unclear. In most cases, investors do not know where their cash is exactly going.
Absence of adequate research, mispricing, low yields, and shady bond issuers are other green bond risks you must remember before investing.
Green Bond Benefits
Besides the environmental advantages obtained from various projects, green bonds have vital intangible and tangible benefits:
- More and more people are choosing green bonds, which could lead to a diversified investor base. Most of these individuals have an investment or environmental mandates
- Some research suggests that these bonds could have a pricing advantage over non-green bonds
- Green bonds have wider oversubscription margins than traditional bond offerings
What about Solar Energy Participants
Participants from the solar energy industry will especially benefit from their green bond issuance. Current standards of this bond consider solar energy projects to be eligible for financing. You must consider numerous factors when assessing if green bond financing is the correct option for participants belonging to the solar energy industry.
Furthermore, when paired against storage, another green financing option, solar projects could be more scalable. At the same time, however, numerous risks impact financing the storage and solar green bond projects, particularly revenue bonds. Issuers must also consider the pandemic’s impact on pricing, demand, energy, and the unpredictability resulting from the economic downturn.
Are Climate Bonds and Green Bonds the Same?
Technically speaking, proceeds from green bonds could be used for various environmental projects, including parks. However, climate bonds and green bonds are more or less the same since the proceeds also go to several climate change projects.
There have been some cases where small portions of proceeds were used for environmental projects but not for climate projects. For instance, the funds from the green retail bonds by Rabo Bank go to climate change and organic farm loan initiatives.
Despite present-day economic issues, experts believe green bonds will experience long-term improvement in utilization and volume globally. As mentioned before, solar energy advocates must consider these bonds to finance related projects and infrastructure.
The ever increasing investor demands, potential pricing benefits, and corporate goodwill, coupled with amiable start-up requirements, the qualification of solar energy for green bond financing will become a hot topic and could multiply issuances by tenfold.