The growing use of green bonds signals that sustainable economic development is becoming a higher priority for businesses.
This was the finding of a new report from Imperial College Business School and TheCityUK, an industry-led body representing UK-based financial and the related professional services industry.
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 - organisations formed between three or more nations to work on issues that relate to all of the countries in an organisation as well as corporates and sovereign states.
“The most important feature of green bonds is that they build awareness of critical issues like climate change." Dr Charles Donovan Director of the Centre for Climate Finance and Investment
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 had been improving, more needs to be done to further this.
Dr Charles Donovan, Director of the Centre for Climate Finance and Investment at 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 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 percent between 2016 and 2017 to $155.5bn.
The report shows the difficulty in finding 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 report authors found that 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 Imperial College Business School and TheCityUK. It examines the state of the relatively new market for green bonds, first issued in 2007 by the European Investment Bank.
The report is available to download from TheCityUK’s website.
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