Green bonds are no different from regular bonds in their nature. Both types of securities offer a predictable return to investors in the form of a fixed coupon yield, in exchange for medium to long-term funding for economic activities. By definition, the mission of a green bond is to finance projects that bring environmental gains, which requires a credible method of assessment over the life of the investment.
The requirements needed to ensure the credibility of green bonds are, however, still a work in progress. Misuse of proceeds can damage reputations, if not the market itself. For this reason, investors are calling for robust, transparent standards for the investment community.
Bonds are used by organizations to borrow money at cheaper rates than bank loans. Once labeled green, their proceeds spur renewable energy, energy efficiency, sustainability, biodiversity and clean infrastructure. Institutional investors buy the bonds to increase their exposure to green assets and diversify their portfolios. The market’s growth is undeniable. Only USD$3 billion of bonds were sold in 2002. Between 2013 and 2014, the market trebled in size, reaching USD$36.6 billion according to the Climate Bonds Initiative.
Raising money with green bonds must come with environmental strings. Projects financed by the bonds will be scrutinized. Will they be green enough to avoid allegations of greenwashing? This is why two sets of standards currently define green bonds. The Green Bond Principles have been adopted by 50 large issuers, underwriters and investors. They set disclosure criteria and where the money can go. An external consultant can provide a second opinion on the bond structure and on the projects financed.
Read the full UN article here