IATE Term of the Week: Green Bond

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IATE Green Bond feature

Most of us have heard of bonds, fixed income instruments that represent loans made by an investor to a borrower, usually corporate or governmental. They are often issued by companies, states and governments to finance projects and operations.

A green bond, on the other hand, is a type of fixed income instrument which is specifically intended to raise funds for climate and environmental projects. Such bonds are typically asset-linked and backed by the issuing entity’s balance sheet. In IATE words, a green bond is a “debt capital instrument issued by a government, international organization or corporate entity (debtor) to a lender (creditor), providing the borrower with external funds which must be paid back over a certain period of time with either a fixed or variable rate of return, in order to finance an environmental project”.

The aim of green bonds is to encourage sustainability and support projects focused on energy efficiency, pollution prevention, fishery and forestry, sustainable agriculture, clean water and transportation, sustainable water management and other related activities. This is why they come with tax incentives that make them a more attractive investment compared taxable bonds. To qualify for the green bond status, bonds are often verified by a third party such as the Climate Bond Standard Board, which confirms that it will fund projects which benefit the environment.

History and Etymology

The English term “bond” is related to the etymology of “bind”, and its usage in the sense of a binding instrument dates from at least the 1590s. Nevertheless, the first “green bond” was issued only in 2008 by the World Bank. This turned out to be a historical event that fundamentally changed the way stakeholders work together.

IATE_Green Bond
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Not long after they started to be referred to as climate bonds, in accordance with their purpose. However, according to Mackenzie and Ascui, climate bonds only represent an extension of the green bond concept since they raise finances for investments in emission reduction or climate change adaptation[1]. IATE seconds this point of view, as the “green bond” entry[2] clearly instructs “not to confuse with” “climate bond”.

Future

Even though bonds have been around for a long time now, and green bonds were not a tremendous invention per se, they have brought important changes in the way of doing business. They help the issuers diversify their investor base, increase demand when compared to standard bond offerings, demonstrate commitment to values that stakeholders find important, and show their interest in sustainable economy. The most recent case is that of Germany, which raised €6.5 billion from its first issued green bond. It is to expect that other countries and bodies will follow this example. One thing is certain – green bonds are here to stay.

 

Sources

[1] Mackenzie, C and Ascui. F. Investor leadership on climate change: an analysis of the investment community’s role on climate change, and snapshot of recent investor activity Archived 2012-04-26 at the Wayback Machine. Published by the UNEP Finance Initiative and UNPRI, 2009.

[2] IATE. 2016. IATE – Entry ID 3530020. [ONLINE] Available at: https://iate.europa.eu/entry/result/3530020/en-all. [Accessed 14 September 2020].

Climate Bonds Initiative. 2020. Explaining green bonds. [ONLINE] Available at: https://www.climatebonds.net/market/explaining-green-bonds. [Accessed 13 September 2020].

Euractiv. 2020. Germany raises €6.5 bln from first-ever green bond – EURACTIV.com. [ONLINE] Available at: https://www.euractiv.com/section/energy-environment/news/germany-raises-e6-5-bln-from-first-ever-green-bond/. [Accessed 14 September 2020].

IATE. 2016. IATE – Entry ID 3530020. [ONLINE] Available at: https://iate.europa.eu/entry/result/3530020/en-all. [Accessed 14 September 2020].

Investopedia. 2020. Bond. [ONLINE] Available at: https://www.investopedia.com/terms/b/bond.asp. [Accessed 14 September 2020].

Investopedia. 2020. Green Bond. [ONLINE] Available at: https://bit.ly/2R7pTie. [Accessed 13 September 2020].

Luxembourg Stock Exchange. 2020. Green bonds. [ONLINE] Available at: https://www.bourse.lu/green-bonds. [Accessed 14 September 2020].

Wikipedia. 2020. Bond (finance). [ONLINE] Available at: https://en.wikipedia.org/wiki/Bond_(finance)#Etymology. [Accessed 13 September 2020].

World Bank. 2019. 10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets. [ONLINE] Available at: https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-of-green-bonds-creating-the-blueprint-for-sustainability-across-capital-markets. [Accessed 13 September 2020].


Written by Lara Karlović, a digital marketing enthusiast with experience in social media management, SEO copywriting and content marketing.