Moody’s reported this week that the global issuance of green bonds in 2016 could surpass $50 billion “by a significant margin.” Merely meeting the $50 billion threshold would mark a nearly 20% increase over the $42.5 billion issued 2015, which itself was the best year for green bonds since they were introduced in 2007.
Just like regular bonds, a green bond is a financial instrument through which the investor lends the issuer money, and the issuer promises to repay the investor the principal, plus interest, at an agreed time. Green bonds are not necessarily different from regular bonds with regard to their yield or tax treatment (indeed, the creditworthiness of a green bond issuer can be as variable as that of any other bond issuer).
Instead, green bonds’ distinctive feature is that the proceeds can be allocated only to projects related to environmental sustainability. To help define a qualifying investment, the International Capital Markets Association developed a set of “Green Bond Principles,” which recognize several broad categories of potentially eligible projects, including, but not limited to, the following:
- Renewable energy;
- Energy efficiency (including efficient buildings);
- Sustainable waste management;
- Sustainable land use (including sustainable forestry and agriculture);
- Biodiversity conservation;
- Clean transportation;
- Sustainable water management (including clean and/or drinking water); and
- Climate change adaptation.
Green bonds benefit issuers by enabling them to set themselves apart from others in the bond market. The bonds benefit investors by enabling them to target their investment to assets with specific environmental and societal attributes.
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