France launched its green bond scheme at the start of 2017. A green bond works like a traditional bond but is issued to finance an environmental project.
The amount is not yet publicly disclosed but could be in the billions. This would make it the first green sovereign lending scheme of this size in the world. In late 2016, Poland introduced a system of green bonds worth EUR750 million.
The niche market is still in its infancy, but it has grown tremendously over the past three years. This is especially true since the Paris Agreement was signed on climate change.
What are green bonds?
Green bonds are issued in the same manner as conventional bonds. These financial instruments are loans made by public or private corporations, governments, and institutions. They provide external funds for long-term investments and financing at different interest rates and conditions.
Green bonds are a part of the private, international, and sovereign markets. These bonds represent about US$170 billion or less than 1% of the global bond market.
Green bonds are not managed by the accounting office but by the general management of the company. This is because they can have a negative impact on the reputation and image of the company.
Green bonds allow you to track the funding coming from the central treasury (a third-party audited report must be able to monitor cash flow in the issuer statement) and to ensure regular reports about the use of funds. Green bonds are a way to measure the environmental performance of investment projects, such as the financing of wind farms, the establishment of renewable energy sites, or green infrastructure.
Investors have many benefits. Investors will be able to identify the exact project that their money is going towards (“I know exactly what I am funding”) and, therefore, judge the quality and reliability of the issuer based on the different assessments of environmental risk of the green bonds and the issuer as a whole.
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Investors have an advantage in terms of communication and legitimacy, as the context places some pressure on the companies to satisfy the impact requests from investors. By linking their words with their actions, they can prove that their process is sustainable up until the funding stage.
It also allows for a directer dialogue to begin between issuers and investors than with equity funding, which doesn’t allow consistent identification of investment projects.
What is the true impact on the environment
The question of how to measure environmental impact still remains. How can environmental benefits from an investment project be assessed? Is the answer to the problem in a standard measurement tool or in ad-hoc measurements for each project?
The environmental impact of each green bond will be determined by the expectations, the execution, and the results of the project.
Investors are paying extra for environmentally friendly bonds, according to Barclays. Pricing can be complex. Investors are sometimes not prepared for higher prices.
Green investors are willing to pay a higher price for bonds as they do not prioritize the price.
Niche markets that can grow
The climate talks held in Marrakesh in 2016 allowed African countries to show a greater interest in green bonds. Morocco, for instance, launched green bonds through several banks as well as public companies in November 2016. The total amount was in the region of EUR150 million.
Capital Markets Authority announced that the launch of the first Kenyan green bonds would be in 2017. Nigeria, West Africa’s largest economy, is also working on its green bond launch. Nigeria is planning a bond issuance of EUR63 million for funding green projects in the first quarter of 2017. A second issuance will be at the end of this year.
While European countries are still considered to be the leaders of the private sector in green bond issues, interest in renewable energy and sustainable economies has grown rapidly on the African continent as well as in many Asian nations, including India, Japan, and South Korea, and in particular China.
Bonds at the next level
Institutional investors and asset managers dominate the green bond market. In 2016, the Chinese market issued the majority of green bond issues, accounting for the outstanding amounts.
The Chinese market is only open to local investors. This prevents a true expansion of the market. Novethic says that some green bonds may be too small for certain large funds.
