Investing in bonds is a bit like being the agent in a spy thriller. You shoot. You hit. You shoot. You fail. It is an interplay between risk and trust, successes and losses, instant and well thought out decisions. You are constantly hoping to catch the right moment to invest. Your capital will certainly lead to consequences as it enables the recipient to further their business aims. Thus, you bear some responsibility for what you facilitate with this capital.
Welcome to another thrilling topic, that I encountered at WBCSD and which I would like to share: green bonds. Mexico City has introduced a 50 million USD green bond in 2016 aiming to reduce 10 million tonnes of carbon dioxide to fight climate change. The resounding success led to the regular implementation of green bonds worth 200 million USD per year.
But, what are green bonds at all? Green bonds provide an investment alternative with sustainable impact. They are possible drivers to finance climate change solutions. The American rating agency Moody’s defines them as “fixed-income securities, that raise capital for use in projects or activities with specific climate or environmental sustainability purposes”. In case of Mexico City these include LED street lights and a modernised public transport system. The total market already reached 170 billion USD and is continuously growing. The rating agency Moody’s reported already in November that the global green bond issuance outperformed the total volumes of 2016. Since 2011 the emission volume of green bonds grew by 150% per year. Those numbers emphasise how strong the interest in sustainable solutions in financial terms is. The demanded quantity of these bonds is shooting through the roof.
This year, France became the first member of the European Union to launch a green bond. In their case sustainability applications are for example energy efficient properties, charging stations for electric cars, energy saving street lights or cycle paths. The case of France shows how attractive green bonds effectively are: many times oversubscribed.
A huge problem, however, is: what makes a bond “green”? Businesses can proclaim their bonds as sustainable and green because there is no legal framework or disclosure regulation. Despite good intentions companies could for example still treat their employees badly or use nuclear energy supply and thus infringe the triple bottom line idea. This lack of rules makes it difficult for the investor to support a truly valuable business, worth the smaller rate of return. An approach to bring transparency and common standards in the market are the “Green Bond Principles”. They promote integrity through voluntary guidelines for companies. Another possible solution is offered by the non-profit organization “Initiative Green Bonds”. It groups criteria together with independent working groups and organizations, such as the WBCSD, and offers a certification for green bonds.
Green bonds are an actively developing and highly dynamic field to be involved in regarding sustainability in the real-life context. The green niche seems to establish itself in the market, sustainable growth becomes valued and attractive. It will be exciting to track the market development. And one day possibly hit the target.