A closer look at green bonds and the recent explosive development of the green bond market

Green bonds are the answer to growing investor demand for engagement in climate-related opportunities. But why green bonds and how do they work? What does the future hold for green bonds?

Since its first launch by the World Bank together with the Swedish bank SEB in 2008 as a response to increased investor demand for engagement in climate-related opportunities, rapidly growing interest from issuers and investors alike has sent the green bonds market soaring. In 2014 the market grew explosively with issuance of $36.6 billion green bonds – a tripling of the $11 billion issued in 2013. So far in 2015, we have seen issuance of $14 billion. Issuance is expected to ramp up in the remaining part of 2015 in the run-up to the UN Climate Conference in Paris at the end of the year. The Climate Bonds Initiative expects total issuance in 2015 to reach $70 billion, with a stretch target of $100 billion. SEB estimates issuance will hit $70 billion.

The “why” of green bonds is apparent to market actors, with green bonds providing opportunities for issuing companies to attract investors through a green label, and opportunities for investors looking to make sound investments that also carry environmental benefits. All other things being equal, there are few reasons not to go green.

The “what” of green bonds is less apparent, in part due to the pertinent question of what the green in green bonds really means? Companies looking to qualify their bonds as green may find guidance in the Green Bonds Principles, a set of voluntary process guidelines launched by 13 leading international banks in 2014 and updated in March 2015.

According to the Green Bond Principles, a green bond differs from a regular bond in that the proceeds of an issue are directed towards activities with environmental benefits. This is the cornerstone principle of the green bond. Potential eligible green projects for the use of proceeds include renewable energy, clean transportation, sustainable waste management and sustainable land use in businesses such as forestry and agriculture. Other Green Bond Principles concern the evaluation and selection of green projects, management of proceeds in terms of allocating received funds and reporting criteria. Business whose operations fall solely within the scope of eligible green projects can benefit from these principles when issuing corporate bonds, receiving a green label almost free of charge.

The “how” of green bonds is answered by Setterwalls, helping business navigate legal and regulatory complexities in connection with issuances of green bonds.

The future success of green bonds is still an open question. In light of falling electricity prices, the aim of reaching an issuance of green bonds amounting to $70 billion (with a stretch target of $100 billion) in 2015 may seem ambitious. Growing a deep and liquid green bond market requires not only a scale-up of the issuance, but also diversification in currencies and ratings. While the majority of green bond issuance continues to be in USD and EUR, we are pleased to see that development banks have increasingly been issuing smaller amounts of green bonds in a number of other currencies.

Looking at recent Swedish issuances of green bonds and the issuance estimates made by the Climate Bonds Initiative and SEB, among others, Setterwalls, approaches 2016 with cautious optimism.