Climate change is real, the earth is getting warmer, and it is our fault. The rate of human-induced rate species extinction is accelerating to more than 1,000 to 10,000 times the normal rate. Water scarcity is getting worse, where at the current consumption rate, two thirds of the world population may face water shortages by 2025. Our oceans are not in a healthy state either, 63 percent of global fish stocks are considered overfished, and where there are no more fish, we are filling our oceans with plastic waste. In order to combat these and many other challenges affecting the environment, we must all do our part, and that includes the financial services industry.
One way for the financial services industry to be a part of the solution is through green bonds, a financial instrument for debt investors where issuers can raise capital designated for environmentally friendly projects. Many issuers say they follow the Green Bond Principles, endorsed by the International Capital Market Association as well as third-party verification from parties such as Moody’s Investors Service, Bloomberg LP, Vigeo Eiris, Sustainalytics, Cicero Shades of Green, or Climate Bond Standard Board, which certifies that the bond will fund projects that include benefits to the environment. The EU is also creating a green bond standard based on the Green Bond Principles by the International Capital Market Association.
Although there are other sustainable debt instruments, green bonds are dominating the market, which reached $247 billion worth of sustainability-themed debt instruments in 2018, where green bonds amounted to $182 billion.
As shown in the above chart, green bonds are separate from sustainability bonds, which combine both environmental and social objectives as well as social bonds, whose proceeds are dedicated to projects aimed at improving social welfare.
According to Bloomberg New Energy Finance, the market for green bonds is expected to keep growing, with Europe alone needing $203 billion of additional investments yearly to reach the 2030 emission targets set in the Paris agreement. Looking at the first quarter of 2019, green bond issuing reached over $40 billion, which is up approximately 46% compared to the first quarter of last year.
Kicking of the second quarter of 2019, The Netherlands has issued a green bond of up to $6,75 billion for projects that are set to lower carbon emissions in the long run.
This is matched by an increasing demand for sustainable investments. According to the U.S. Forum for Sustainable and Responsible Investment, $12 trillion of assets are managed under a responsible investment mandate, and globally the amount of assets under comparable mandates exceed $30 trillion.
In short, green bonds promise to benefit companies, investors and the planet. Research shows that there is no tradeoff between making an environmental impact and profit, and some studies even see companies issuing green bonds outperforming in terms of long-term value. Even with similar returns as conventional bonds, green bonds has the potential to have a lower risk profile as green bond issuers are showing that they address long-term climate risk that could potentially affect their creditworthiness.
There is certainly no silver bullet to creating a better future, but green bonds is a way to get institutional money in on becoming a part of the solution, while still making a profit.