What are green bonds?

As interest in environmental, social, and governance (ESG) issues has grown, the market for green bonds and other green assets has expanded rapidly. Today, this market includes a wide range of green debt instruments and new asset types are emerging regularly. However, a lack of universal global standards for defining and categorizing these assets poses a challenge for investors. Global and national efforts are underway to enhance standards and reporting.

***

Get weekly insights from The Intuition Finance Digest. Elevate your understanding of the finance world with expertly-crafted articles and podcasts sent straight to your inbox every week. Click here: https://www.intuition.com/finance-insights-the-intuition-finance-digest/

***

Green bonds and assets landscape

Until recently, many financial market participants may have found climate-related financial risks to be largely abstract. However, it has become increasingly difficult for reasonable observers to deny that there is at least an element of climate change causality behind events such as the catastrophic fires in California and Australia or the floods in Western Europe.

In the face of such events, financial decision-makers and investors are quickly becoming more “climate aware.” For example, institutional investors and banks, which are answerable to end-investors and shareholders, are under growing pressure to present their investing and lending decisions as compliant with emerging environmental, social, and governance (ESG) standards. Large fixed income buy-side institutions are increasingly motivated – or even required – to have a positive climate impact as well as generating financial returns.

As a result of these pressures, financial markets are adapting and changing. In many cases, bonds and other instruments which do not meet relevant ESG criteria trade at a discount to those that do – this gap is likely to widen in the future.

Increasingly, investors are allocating resources to instruments that are certified as adhering to certain ESG principles, such as green bonds and other so-called labeled assets (assets that have achieved some type of certification or label associated with ESG characteristics).

As these shifts occur, the market for green bonds and green assets is growing fast. Investors are snapping up new issues and dedicated international climate funds and development banks are looking to support the flow of capital into environmental projects – including the development of green bond markets – using concessional finance, credit enhancement tools, and their own balance sheets.

But what are green bonds and assets, and why do they matter?

What are green assets?

Green assets are financial instruments that raise funds which will be used to finance environmentally beneficial or “green” projects or business activities. Green projects may include building renewable energy capacity, clean transportation infrastructure, or energy-efficient buildings. Typically, green assets are bonds, but they may also be loans or securitized instruments such as asset-backed securities.

In the case of green bonds, most are backed by their issuers’ total balance sheets. However, some green bonds are instead backed by revenues from the associated green projects.

Other types of green instrument, such as green asset-backed securities, are backed by cash-flows from the underlying green assets. Solar asset-backed securities, for example, are backed by cash flows from pools of loans used to finance the installation of solar energy systems. Green assets are associated specifically with environmental concerns, rather than social or governance ones. However, as green assets have become more popular, new instruments targeting non-environmental ESG issues have emerged.

Collectively, these green, social, sustainable, and other types of ESG-linked instruments are sometimes known as “labeled” bonds. This term properly applies only to those instruments that have achieved a green or sustainable “label” through a recognized certification process. At times, however, the term is used to refer to the category overall.

***

Intuition Know-How, the world’s premier digital learning solution for finance professionals, offers a comprehensive course on Sustainable Assets. More details can be found below.

If you would like to speak to a member of our team about gaining access to this course, please fill in the form.

A growing range of sustainable assets is available in today’s markets. Instruments such as green bonds, green loans, social bonds, sustainability-linked loans, and others have shown significant growth as investors seek out sustainable and responsible investment options. However, despite the market’s growth, important questions remain about global standards for categorizing these instruments and the quality of asset certification and verification processes.

This course provides an overview of various types of sustainable asset, covering topics such as:

• The definition of green bonds and other green assets and key global standards
• The definition of social bonds and other sustainable instruments and key global standards
• The state of the green bond market, including key issuers and the role of certification bodies