Green bond use signals growing environmental focus

The increasing visibility and use of green bonds is sending a strong signal that sustainable economic development is moving up the corporate agenda, say TheCityUK and Imperial College Business School in a new report published today.

The report, ‘Understanding Green Bonds’, found that for many market participants, the main function of a green bond is to act as a cost-free signal to stakeholders of a firm’s commitment to improving the environmental performance of their portfolio. It also found a growing appetite to use green bonds with a wider range of entities starting to use them, including multilateral institutions, corporates and sovereigns.

What is more difficult to find is hard evidence to show that green bonds are contributing additional money for environmental projects which could not have been achieved using more traditional capital-market instruments.

The core distinguishing feature between green bonds and conventional bonds is the promise that the proceeds raised will be used for environmentally-friendly projects. The report found that while standards and transparency have been improving, more needs to be done to further this.

Anjalika Bardalai, Chief Economist and Head of Research, TheCityUK, said,

While it’s hard to measure the environmental impact of green bonds, it is clear they have an important role to play. They send a strong signal, from both issuers and investors, of a financial commitment to making a constructive contribution to environmental goals.

The growth in this asset class shows that the financial services industry can play a critical role in facilitating environmentally sustainable economic development. In that respect, the green bond market is off to a great start.

Charles Donovan, Director of the Centre for Climate Finance and Investment, Imperial College Business School, said,

The most important feature of green bonds is that they build awareness of critical issues like climate change.  Green bonds are the best known and most developed segment of green finance, but this market alone cannot not transform the international financial system.   The next step is for market participants to design new debt issuances that reduce financial risks to investors by aligning with sustainability goals.

The global market for green bond issuance expanded 78% between 2016 and 2017 to $155.5bn.

One positive effect of issuing a green bond over a conventional bond is that it can broaden the pool of interested investors outside a firm’s traditional market. Demand for green bonds comes from institutional investors, either by purchasing directly or by investing in green bond funds. Green bond underwriters support the process of issuance and investment.

‘Understanding green bonds’ is the second in a series of reports on green finance from TheCityUK and Imperial College Business School. It examines the state of the relatively new market for green bonds, first issued in 2007 by the European Investment Bank.