A green bond is a type of bond that provides regular interest payments and is used to fund projects that help protect the environment. These bonds are also called climate bonds when they support projects that reduce the effects of climate change. Green bonds follow rules called the Green Bond Principles, created by the International Capital Market Association (ICMA). The money from selling these bonds must be used for specific types of projects. Examples of eligible projects include renewable energy, improving energy efficiency, preventing pollution, managing natural resources in an environmentally friendly way, protecting land and water ecosystems, promoting clean transportation, and helping communities adapt to climate change.

Like regular bonds, green bonds can be issued by governments, large banks, or companies. The organization that issues the bond must repay the money and any interest. The main difference is that the funds from green bonds are only used for projects that benefit the environment or help address climate change. This allows investors to support their goals related to environmental, social, and corporate responsibility (ESG) by investing in these bonds. Green bonds are similar to sustainability bonds, but sustainability bonds also require the projects to have positive social benefits.

The growth of bond markets offers more chances to fund important goals, such as the Sustainable Development Goals (SDGs), climate action plans, and other projects that support environmental progress. A United Nations conference in 2021 discussed the importance of sustainable bonds and noted that about 1% of the roughly €300 trillion in financial assets worldwide could help achieve the SDGs.

Usage

Green bonds, which were once called climate bonds, are used to raise money for climate change solutions. These bonds support projects that help reduce greenhouse gas emissions, such as renewable energy or energy efficiency, or projects that help communities adapt to climate changes, like building flood defenses or protecting coral reefs.

Climate bonds were first proposed in the 2000s and have grown quickly since then. In 2016, the total value of climate bonds was about 160 billion dollars, with 70 billion issued that year. By 2019, the value of bonds labeled as green or climate-related reached 255 billion dollars. Today, thousands of organizations worldwide, including governments, banks, and companies, issue these bonds.

Like regular bonds, green bonds can be issued by governments, banks, or companies. The issuer promises to repay the bond over a set time, with either a fixed or changing rate of return. Most green bonds are backed by specific assets or projects, ensuring that funds are used only for climate-related goals, such as renewable energy or climate protection programs.

The Climate Bonds Initiative, based in London, created the first program to certify climate bonds. This program has inspired other countries to develop their own rules for green bonds.

Green bonds are similar to theme bonds, like railway or war bonds from the past. Theme bonds help governments and investors direct money to important causes, such as climate action, while offering the same financial risks and returns as regular bonds. They are traded in markets like other bonds and are rated based on the creditworthiness of the issuer.

Green bonds are loans issued by organizations to fund environmentally friendly projects. Their use has grown rapidly, with an average increase of over 50% each year for five years. In 2018, green bonds totaled 170 billion dollars, and by 2021, they reached 523 billion dollars. These bonds help lower borrowing costs for green projects by attracting investors, who often accept lower returns compared to regular bonds. Scientists suggest including climate risk in bond risk assessments to increase borrowing costs for carbon-heavy projects and reduce risks for green bonds.

Legally, green bonds are similar to traditional bonds. Promises to investors are not always written into contracts, and many issuers follow guidelines from groups like the International Capital Market Association or the Climate Bonds Initiative. The Paris Agreement encouraged clearer reporting to prevent "greenwashing," or falsely claiming a project is green. The European Union is developing a voluntary standard for green bonds to ensure they align with sustainable activities, but no global rules require this yet.

The European Union created its "Next Generation EU Green Bonds Framework" to fund part of its recovery plan after the pandemic. This plan aims to invest 750 billion euros in grants and loans for EU countries, with up to 30% of the budget raised through green bonds. By January 2022, 14.5 billion euros had already been collected. The EU plans to enforce a new green bond regulation in December 2024, allowing companies and governments to issue "European Green Bonds."

Studies show that some issuers may falsely claim their bonds are green, misleading investors into accepting lower returns. Research suggests this behavior can happen because there are not enough clear rules to stop it. Standardizing how green bonds are labeled could improve transparency. Rating agencies should pay more attention to this risk to better understand and measure it.

Benefits

Bond markets are growing, which creates more chances to fund the Sustainable Development Goals (SDGs), Nationally Determined Contributions, and other green projects. A United Nations conference in 2021 focused on the SDGs and highlighted the importance of sustainable bonds. The conference noted that about €300 trillion in financial assets exist globally, and only 1% would be needed to achieve the SDGs. Green bonds are becoming a common way to fund clean and sustainable infrastructure projects, which often require large amounts of money. These bonds help countries access capital from financial markets while supporting projects that meet environmental standards. In developing countries, green bonds already fund important projects, such as renewable energy, public transportation systems, and water supply systems.

In 2016, green bonds raised over $93 billion for projects that help the environment. However, this amount is still about 1% of all global bond sales.

A report by the Climate and Development Knowledge Network and PricewaterhouseCoopers explains that green bonds offer three main benefits for countries and their environmental goals:

• They help countries get more money for green projects, which encourages more such projects. Today, green bonds mostly fund projects in renewable energy, energy efficiency, low-carbon transportation, sustainable water systems, and waste management.
• They allow sustainable investors to support environmental projects. Bonds are a familiar financial tool for investors, so they do not need much new knowledge to use them. Investors often prefer to invest in projects that create the most environmental benefits for each dollar spent. Emerging and developing countries may offer these opportunities because their projects can be less expensive.
• They can help a country’s financial system grow beyond projects related to the environment.

Studies show that green bonds may help reduce investment risks. This happens because green bonds are held by long-term investors, which means they are less likely to be sold quickly. This can lead to more stable prices and less volatility in the market. However, this benefit must be weighed against the "greenium," which is the extra cost sometimes paid by investors in green bonds.

Scale

In 2007, the European Investment Bank created a special type of bond called a "Climate Awareness Bond." This was the first fixed income product linked to socially responsible investments. The bond was designed to fund projects that support renewable energy and improve energy efficiency. In 2008, The World Bank issued the first "green bond" with a traditional structure, different from the European Investment Bank's equity-linked Climate Awareness Bond.

The green bond market grew quickly after 2015. Between 2015 and 2016, the Climate Bonds Initiative reported a 92% increase in green bond issuance, reaching $92 billion. Many types of issuers, including companies and governments, began issuing green bonds. For example, Apple became the first technology company to issue a green bond in 2016, and Poland became the first sovereign country to issue a green bond in late 2016. In 2021, the European Investment Bank was the top issuer of green and sustainability bonds among international development banks, providing €11.5 billion in funding.

By 2017, China had the largest share (23%) of the global green bond market. The Business and Sustainable Development Commission estimates that at least $12 trillion in business opportunities exist through sustainable practices. The United Nations says $2.5 trillion per year is needed to achieve the Sustainable Development Goals (SDGs), with $1 trillion specifically required for sustainable energy. Many projects and assets that support the 17 SDGs require this funding to develop and operate.

Green finance has been effective in supporting sustainable energy and climate action. The Paris Agreement, which aims to reduce greenhouse gas emissions, became active in November 2016 after 196 countries agreed to its goals. Large amounts of money are now needed to turn these agreements into real actions and build a low-carbon, climate-resilient economy.

Despite recent increases in climate funding, a large gap remains unless new financial sources are found. Public funding alone cannot meet the needs, and the private sector is expected to provide about 80–90% of the required funds. Banks and other financial institutions will need to use tools like capital markets, insurance, and peer-to-peer lending to help.

The Climate and Development Knowledge Network reports that investors are increasingly interested in green bonds. Asset owners and managers are diversifying their investments to include projects that create positive environmental impact, not just financial returns. As the world moves toward a green, low-carbon economy, the green bond market is expected to grow and attract more issuers and investors.

Emerging and frontier markets are developing financial systems, including markets for climate bonds and green investments, more quickly than most developed countries. These regions are creating tools like investment-grade debt and equity products to support climate-related projects.

Reporting

The creation of green bonds has caused a lot of discussion because there are no clear, shared rules for how they are made. Two main sets of rules guide the creation of green bonds: the Green Bond Principles (GBP), created by the International Capital Market Association (ICMA), and the Green Bond Standard (GBS), set up by the European Union. Both sets of rules aim to help the green bond market become more consistent, offering similar standards for different groups involved.

Even though there is more effort to create consistency, differences still exist in how green bonds are made, what happens after reports are shared, and how well they match the climate goals of the companies that issue them. Many companies do not set long-term climate goals, often only setting targets that last 10 years. A major study showed that most green bonds focus on short-term goals, which do little to help achieve long-term climate goals. Also, there is not enough detailed information about how money raised from green bonds is used for specific projects, showing the need for better transparency and reporting.

Criticism and controversies

The green bond market has faced criticism from people around the world. Some question whether certain bonds truly support environmentally friendly projects. This criticism includes both the projects funded by the bonds and the environmental practices of the companies that issue them. In May 2017, the Climate Bonds Initiative decided not to approve a "green" bond issued by Repsol. The money from this bond would have been used to improve the efficiency of the company's oil and gas operations. A group that is not part of the government said that even though the projects would reduce carbon dioxide emissions, the company's environmental plans were not strong enough to be considered truly green. This criticism also involved Vigeo Eiris, the company that checked the environmental claims of the Repsol bond. In 2016, Vigeo Eiris was part of another controversy. A group called Western Sahara Resource Watch, supported by a Norwegian trade union, criticized Vigeo Eiris after it reviewed a green bond meant to fund solar projects in Western Sahara, a region claimed by Morocco but not officially recognized as part of its territory.

In general, experts and people who work in financial markets have noticed that voluntary labels for green bonds can be misleading. This happens because there is not enough government regulation and because some companies may take advantage of higher prices for green bonds, known as the "greenium." In the primary market, the difference in prices for green bonds can range from -85 to +213 basis points. In the secondary market, the average "greenium" is usually smaller, ranging from -1 to -9 basis points.

Examples

In 2001, voters in San Francisco approved a way to borrow money called "solar bonds" through a change to the city's rules (Section 9.107.8). These bonds were used to fund renewable energy and energy-saving projects on homes, businesses, and government buildings. The campaign for solar bonds, known as Proposition H, aimed to help the city address climate change. The solar bond program was part of San Francisco's renewable energy efforts, managed by the San Francisco Public Utilities Commission CleanPowerSF, a program that allows communities to choose cleaner energy sources. By 2024, programs like CleanPowerSF in California were the largest issuers of Green Bonds in the United States.

In 2020, West Berkshire Council in the UK became the first local government in the country to issue a green bond. The bond reached its £1 million funding goal five days early. Of the money raised, 22% came from residents of West Berkshire, who invested an average of £3,500 each. A total of 640 investors participated in the bond. In September 2021, the UK sold its first "green gilt," a type of government bond, raising over £100 billion from investors, the highest amount ever for a UK government bond sale.

In Canada, an innovative type of bond called "The Community Bond" allows organizations to raise money without following traditional rules. This bond is used as a "Green Bond" by groups like Solarshare to build solar farms owned by communities, ZooShare to fund a biogas plant, and Hallbar.org to support energy-saving home upgrades and buildings with LEED certification.

In 2022, the European Investment Bank issued EUR 19.9 billion in Climate and Sustainability Awareness Bonds. The bank increased the share of its investments focused on climate and sustainability from 21% in 2021 to 45% in 2022. On December 21, 2024, the European Union's Green Bonds Regulation will take effect, allowing companies, local governments, and other organizations in the European Economic Area to issue "European Green Bonds" (or "EuGB").