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What are Green Bonds and why invest in them?

Proshare

Monday, August 21, 2017 6:00PM /Bola Shomefun

Green bonds are bonds which are issued to raise finance for environmentally friendly projects, such as low carbon/energy efficiency projects, onshore wind and ground mounted solar projects. Since the first bonds were created in 2008 by the World Bank and Swedish Bank, SEB, they have gained momentum and are expected to grow at an increasing rate, which is why a consortium of leading banks (including Bank of America, JP Morgan and Citigroup) have recently issued guidelines to ensure integrity is maintained in the green bond market.

An institution issues the green bond to investors and has a maturity date and a coupon which reflects the return on investment for the subscribers to that bond. Funds raised are then invested in green projects—such as those referred to above.


Why are green bonds successful at the moment?


A combination of factors:

·          Bonds are a much cheaper way of raising capital

·         Renewable technologies are maturing to a degree that they are able to attract this type of funding

·         Renewable energy is recognised as a viable energy source which can provide energy security and reduce energy poverty via distributed energy solutions—this is important for bonds which are raising capital to assist in less developed markets e.g. Africa Green bonds are given a rating by a ratings agency and are backed by entities such as the European Investment Bank, Zurich and EDF. They are issued in sufficient quantities to be easily tradeable and procure investment from portfolio investors—which means they have a much more diverse investment pool.

They are attractive to institutional investors, such as pension and other funds, given the term and relative cash-flow certainty—which matches the long term liabilities of such investors. They also offer an opportunity for investors to consider the environmental impact of their investments.

The Advantages of Investing in Green Bonds
are:

·         Cheaper finance

·         Ability to raise significant sums

·    Underlying projects need to be strong or some other form of support e.g. multilateral involvement

The main additional advantage of funding projects with finance raised from green bonds is long-term money. Why this is such an important advantage requires an understanding of the availability of affordable and long term finance to renewable energy projects. While banks are still willing to finance quality projects, due to the regulatory environment in which they now operate, banks are usually also looking for syndication, shorter term debt and the ability to exit quickly in order to spread the risk of their investment. Insurance companies, as institutional investors, are also subject to increased regulation which is leading to a shift to shorter term debt.


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