A thriving market
The market for green bonds has been booming. And it’s only likely to get bigger as ever more companies, governments and multinational organisations seek to raise funds to pursue environmentally-friendly projects and as investors see the attractiveness of these assets. For instance, more than 30 per cent of the European Union’s EUR750 billion rescue package is being set aside for green projects.1
But as with any new types of investments, green bonds hide plenty of potential pitfalls – not least because many of them are not as green as they claim to be.
Helping the world to turn green
Green bonds are typically issued to finance specific projects that contribute to a reduction of greenhouse gas emissions, such as renewable energy infrastructure, or that help countries or companies to adapt to climate change, for example by protecting coastal areas against sea level rises. They are issued with provisions governing how proceeds are to be allocated and they tend to carry the issuer’s credit rating.
As such, they are part of the universe of environmental, social and governance-focused (ESG) investing – investment strategies whose growing popularity has been matched by strong returns in recent years and particularly during the Covid pandemic.2 That’s just as well. Environmental- and climate-related investment is going to be vital in the years to come.
Unmitigated climate change could cost the global economy some 30 per cent of its potential GDP per capita by 2100.
Oxford University forecasters estimate that unmitigated climate change could cost the global economy some 30 per cent of its potential GDP per capita by 2100.3 It is estimated that, to limit global warming to 1.5 degrees centigrade from pre-industrial levels, some USD1.6 trillion to USD3.8 trillion needs to be invested annually through to 2050 in mitigation efforts.4
That might appear unrealistic but the money is there. For instance, in 2015, global subsidies to fossil fuels were worth USD5 trillion. That same year, total climate finance was just USD481 billion.
As ESG investing becomes more important so too will green bonds.