A green bond is a bond specifically intended to be used in climate and environmental projects. These type of bonds are usually linked to assets and are backed by the issuer's balance sheet. Green bond projects are supported to encourage sustainability.
Green Bonds are defined as fixed-income financial instruments issued with the aim of addressing climate change and facilitating environmental solutions; those bonds are labelled as green by the issuer.
Since they have similar yields, ratings and return profiles to other fixed income investments, they provide investors with a clear way to get both economic and environmental returns without significant additional risk.
The majority of green bonds are use-of-proceeds bonds or asset-linked bonds, where the issuer promise to the investors that all the raised funds will only go to specified climate-related programs or green assets and thus contribute to beneficial environmental and climate outcomes.
Originally these instruments were conceived so that proceeds were dedicated to finance green assets and projects with climate benefits; however, as market progressively expanded and became increasingly more sophisticated, a broader range of socially-conscious debt labels -SDG bonds, social bonds, even blue bonds- provided other avenues for responsible investment.
The green label can also be applied to a range of financial structures and debt formats, including inter alia, private placement, securitisation and covered bonds.
Green definitions feature which eight sectors were comprised in sector allocations across the globe: energy, buildings, transport, water, waste, nature-based assets, industry and ICT. New issuances, however, include additional sectors and activities.
Green bonds can be placed by central and local governments, banks or corporations.
Following the Climate Bonds Initiative (CBI) terminology, the climate-aligned bond universe includes:
- Fully-aligned issuers with 95% or more green revenues (revenues deriving from climate-aligned assets and green business lines)
- Strongly-aligned issuers (between 75% and 95% green revenues).
- Green labelled bonds.
The green bond labelled market kicked off in 2007 and has grown steadily since then, with the market really starting to take off in 2014. In 2019 bond issuance set again another record, as green bonds issued in that calendar year reached $255bn, that meet internationally accepted definitions of green, a new global milestone.
The most recent forecast by Climate Bonds Initiative indicates a new milestone of $350-400 billion in global annual green bond and loan issuance to be reached in the CY 2020.Sources:
- Climate Bonds Initiative (2018). Climate Bonds Taxonomy, A guide to climate aligned assets & projects. September 2018.
- Climate Bonds Initiative (2019). Green Bonds Market Summary. Q1 2019. April 2019.
- Climate Bonds Initiative (2018). Bonds and Climate Change. The State of the Market 2018. September 2018.
- SEB (2019). Green Bond Market Review and 2019 Outlook. SEB, The Green Bond. SEB Climate & Sustainable Finance Review.
Supporting National Development Banks (NDBs)
The objective is to support NDBs in their efforts to raise private funds at adequate maturities in both local and international capital markets, through the issuance of green bonds or sustainable bonds. Those issuances should attract national and international institutional and impact investors and therefore have an impact on the issuer’s ability to diversify sources of funding, while promoting low-carbon investments or investments with high positive social impacts.
Those projects will also participate in the development of national capital markets. The Program is currently supporting NDBs in Colombia and Mexico.
Supporting Countries in LAC to Design Efficient Incentivization Strategies for Sustainable Bonds
The IDB is also working with other type of players such as Government Agencies, Financial Sector regulatory bodies or domestic Stock and Bond Exchanges in order to support the design of national strategies to incentivize domestic green and sustainable bonds markets. Pilot projects are currently being developed in Brazil, Mexico and Ecuador.
Both sections of the program include a strong dissemination component and all relevant knowledge products will be made available through this platform.
The program is currently being developed thanks to the support of Switzerland’s State Secretariat for Economic Affairs (SECO) for Colombia, Peru and Ecuador – and of the International Climate Initiative (IKI) of the Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) via the LGI program for other countries in the region.
The IDB is working closely with the Climate Bonds Initiative and several trainings and activities will be carried out within LAC countries throughout 2016-2017. The Climate Bonds Initiative is an international, investor-focused not-for-profit. It is the only organization in the world working solely on mobilizing the $100 trillion bond market for climate change solutions.
Beneficiary Institutions will receive technical and promotional assistance throughout the process
Fully-aligned climate issuers
Strongly-aligned climate issuers
Labelled Green bonds
Climate-Aligned Bond Universe
Development Banks have crucial role as issuers and anchor investors
Source : Climate Bond Initiative
Quick guide to terminology
• Fully-aligned climate issuers: Bond issuers that derive >95% of revenues from climate-aligned assets and green business lines.
• Strongly-aligned climate issuers: Bond issuers where 75%-95% of revenues are derived from climate-aligned assets and green business lines.
• Climate-aligned bond universe: the term is used to describe the full universe of aligned-outstanding bonds - i.e. from fully aligned issuers, strongly-aligned issuers and green bond issuers.