A United Nations report calls climate change as a “threat multiplier,” and very rightly so. Today, climate change is a pressing global issue. Among the multiple initiatives to combat climate change by lowering the carbon footprint, emerge a niche segment dubbed as the green bonds.
In the recent years, there has been a surge in the use of green bonds to finance climate-friendly projects. This rise has largely synchronized with the rising awareness, concern and consciousness on issues of climate change, as well as attempts to build a low-carbon future.
Here’s an overview of green bond market over the years.
Green bonds are fixed-income securities issued by countries, institutions and corporates. The proceeds are committed to finance environmental and climate-friendly undertakings, such as renewable energy projects, green buildings or resource conservation. Green bonds are a segment of the wider umbrella of sustainable bonds, which includes social and sustainability bonds as well.
The world’s first ever green bond was issued back in 2007 by the European Investment Bank (EIB). EIB pioneered the green bonds market under the label of Climate Awareness Bond (CAB). This was followed by the World Bank issuing its first green bond in 2008 in partnership with SEB (Skandinaviska Enskilda Banken AB). Since 2008, the World Bank has issued nearly $16 billion in green bonds.
In March 2013, International Finance Corporation (IFC) issued a $1 billion green bond to support IFC climate-friendly projects in developing countries. The bond was heavily oversubscribed, confirming the “demand from an increasing number of investors interested in climate-related opportunities.”
In 2013, Vasakronan, Sweden’s largest property company, issued the world’s first green corporate bond. In 2018, they took the next step and issued the world’s first green commercial paper, with the funds earmarked for green assets. The same year, Bank of America Corporation (BAC) announced its issuance of a green bond to advance renewable energy initiatives and promote energy efficiency.
In 2014, Unilever (UL) declared the first ever green sustainability bond. It was Unilever’s first green bond in the sterling market, and the first by a company in the FMCG sector. During the same year, SolarCity (now Tesla TSLA) launched the nation's first registered public offering of solar bonds, creating a simple way for individuals across the U.S. to “earn attractive returns on their investments while participating in the nation's transformation to clean energy.”
The year 2014 also witnessed Toyota’s (TM) introductory auto industry asset-backed green bond. The bonds were issued to support the sale of environment friendly vehicles and serve to advance its extensive environmental commitment. Till December 2020, Toyota issued green bonds totaling $6.1 billion.
The participation and involvement of corporates, which began in November 2013, got propelled by the historic agreement at the 2015 Paris Agreement as hundreds of companies pledged to contribute towards the cause.
Apple (AAPL) issued its first $1.5 billion green bond in February 2016. In June 2017, then President Donald J. Trump announced the withdrawal of the U.S. from the Paris Climate Accord. It was then said that the U.S. will “begin negotiations to either re-enter or negotiate an entirely new agreement with more favorable terms for the United States.”
However, corporates continued with their commitment towards the cause. Apple came up with a follow up second round of $1 billion after the former U.S. President’s announcement of its intention to withdraw. In November 2019, Apple issued its third set of green bonds and its first in Europe, with two bonds each at €1 billion (totaling approximately $2.2 billion). These bonds were dedicated to global initiatives that address its carbon footprint.
During the same year, Verizon (VZ) became the first U.S. telecom company to issue a green bond. The bond offering raised almost $1 billion in net proceeds for renewable energy, energy efficiency, green buildings, sustainable water management and conservation. In October, Pepsi (PEP) issued its first ever green bond for $1 billion.
In May 2021, Amazon (AMZN) announced the issuance of a $1 billion sustainability focused bond. Amazon is looking to use the proceeds towards initiatives it has worked on over the years, which include renewable energy, clean transportation and sustainable buildings. In 2019, Amazon launched the Climate Pledge, which aims to meet the Paris Climate Agreement in 2040, 10 years before the agreement's official goal of 2050.
According to a report by Moody’s, sustainable bond issuance (green, social and sustainability) may top $650 billion in 2021, representing a growth of 32% over the previous year. The issuance of green bonds is estimated at $375 billion, while the remaining is split between social and sustainability bonds. According to the Climate Bonds Green Bond database, the green finance market reached its most substantial milestone yet, with $1.002 trillion in cumulative issuance since market inception in 2007.
Currently, Europe is the largest market for green bonds in the world. However, the green bond market is expected to strengthen in the U.S. with the new administration, which is more climate conscious. In early 2021, the U.S. officially rejoined the Paris Accord.
“Addressing the real threats from climate change and listening to our scientists is at the center of our domestic and foreign policy priorities,” the official statement says.
In addition, China and India will be key players going forward. China has pledged for net-zero emissions by 2060 and India has partnered with the U.S. on “Climate and Clean Energy Agenda 2030 Partnership.” India and the U.S. have set ambitious 2030 targets for climate action and clean energy.
From an investment perspective, in addition to participating in the individual bonds open to retail investors, investors can consider exchange traded funds (ETFs), which offer a diversified exposure to green bonds. Two ETFs, which capture the issuances by governments, municipalities and corporates are:
Disclaimer: Information on company press releases. The author has no position in the index or stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in it are totally unintentional.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Prableen Bajpai
Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.
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