In the face of the climate crisis, we have seen government entities and corporations increasingly turning to green bonds to raise the capital required to achieve the Paris Agreement’s goals.
Can green bonds really help achieve a positive impact on the environment while earning a return?
Green bonds are fixed-income financial instruments that entities issue to finance projects and operations. As discussed in a previous post, green bonds are akin to corporate or government bonds.
According to a report by Moody’s ESG Solutions, the issuances of these instruments hit a record $523 billion last year, with a 78% increase over the $293 billion issued in 2020 – a total that is set to grow further and projected to reach approximately $775 billion globally in 2022, with European issuers keeping the lead, as shown in the chart below.
An estimated US$6.9 trillion per year of climate-aligned infrastructure spending is required to meet the Paris Agreement’s goals of keeping global temperatures from exceeding 1.5°C – 2.0°C above pre-industrial levels. So it’s safe to say that the need for capital for climate-related investments in the coming decades is immense.
For investors, green bonds represent a unique opportunity to pursue positive environmental change, earn attractive fixed income returns and build a sustainable portfolio.
There is a growing shift toward green financing with government and industry commitments toward net-zero greenhouse gas emissions. Investing in green bonds is a way for lenders to satisfy Environment, Social and Governance (ESG) requirements and green investment mandates.
Most major lenders have already articulated net zero emissions targets with sustainable debt surpassing $1.6 trillion in 2021, more than doubling what it was at the end of 2020.
With green bonds, there is an increasingly high degree of confidence that capital being deployed is actually going to assets or projects that are positive for the planet. Thanks to technology and timely data, we expect real time monitoring use of proceeds, underlying asset performance and environmental impact will become mainstream in the next 2–3 years.
Despite all the positive features that make these instruments attractive for investors, traditional green bonds have some aspects that could be optimised. In particular, the monitoring of use of proceeds, asset performance and environmental impact is generally done through periodic manual processes, creating various issues with bond’s underlying data and allowing for greenwashing.
The emergence of tokenized green bonds tied to underlying asset data, however, solves such issues. While still early in its evolution, this blockchain-based financial product is verifiable and tamper-proof, allowing for transparency on use of proceeds and asset performance, and thus evidence that positive climate action has indeed occurred.
How 'green' are your green bonds? Monitor and report green bond impact with verifiable climate data. Contact Allinfra to learn more.