Green bonds are fixed-income instruments whose proceeds are committed to financing projects that mitigate climate change, facilitate climate adaptation, or promote other environmental sustainability purposes. Over the past decade, the market for green bonds has grown rapidly, with issuances reaching record levels in recent years. As investors increasingly prioritize sustainability and climate action, green bonds have become an attractive option for those seeking to align their investments with their values. By investing in green bonds, individuals and institutions can support projects that aim to reduce greenhouse gas emissions, improve energy efficiency, protect natural resources, and promote sustainable development. In December 2020, the green bond market reached a significant milestone, with $1 trillion in global cumulative bond issuance since its inception in 2007 (Climate Bonds Initiative, 2020). Many companies are tapping into this market to fund their environmental- or climate-friendly projects. For example, in 2021, Walmart issued a green bond with an aggregate principal amount of $2 billion to fund projects in the areas of renewable energy, water efficiency, and natural habitat restoration (Broughton, 2021).
There has been a lack of standardization and regulation in the green bond market, despite its growing size. Investors largely rely on issuers’ self-labeling to identify green bonds. When labeling their bonds as ‘green’, issuers are required to include a declaration statement in the offering documents. This statement must indicate that the proceeds from the bond issuance will be used to finance projects that generate measurable environmental benefits. Some issuers use third-party verification to provide an additional layer of assurance. However, not all issuers seek third-party verification since it is not mandatory and involves additional costs.
Are the Bond Issuers Delivering on Their Promises?
Due to the lack of standardization and regulation, tracing the efficacy of green bonds in supporting green initiatives is not an easy task. However, an emerging strand of academic research focusing on the green bond market has shed light on this issue from a statistical point of view. For instance, Flammer (2021) reports that green bond issuers experience an enhancement in their environmental performance after issuance, with an increase in their environmental rating and a decrease in CO2 emissions. This indicates that, on average, the proceeds from green bond issuance are directed towards environmental- or climate-friendly projects.
Fatica and Panzica (2021) examined the relationship between green bond offerings and the reduction of total and scope 1 emissions in non-financial corporations, where scope 1 emissions refer to direct emissions from sources that are owned or controlled by the organization, such as emissions from combustion of fuels in boilers or vehicles. The results of the study demonstrate that companies issuing green bonds, as compared to those issuing traditional bonds with similar financial characteristics and environmental ratings, experience a decline in the carbon intensity of their assets following their entry into the green bond market. The authors established the causal effect of green bonds offering on the reduction of emissions, showing that the decrease in emissions is more pronounced and enduring when green bonds are utilized to finance new projects instead of being used for refinancing purposes. This result implies that the reduction in emissions can be attributed to an increase in the implementation of activities that promote a more climate-friendly approach.
How to Get Started on Investing in Green Bonds?
Investors interested in green bonds can purchase them directly through a brokerage account. To locate green bonds, investors may seek guidance from a financial advisor or consult online resources specifically dedicated to green bonds such as Climatebonds.net and the Nasdaq Sustainable Bond Network. Some commercial platforms such as the Bloomberg Terminal also provide subscribers with handy screening tools.
Alternatively, investors can gain exposure to green bonds by investing in mutual funds that specialize in them. Additionally, green bond exchange-traded funds (ETFs) are also available for trading, such as the iShares Global Green Bond ETF (ticker: BGRN) and the VanEck Green Bond ETF (ticker: GRNB). These ETFs can be bought and sold in the same way as regular stocks.
It is important to note that you will still need to conduct a fundamental analysis of the bond issuer’s creditworthiness and pay attention to the ratings of the bonds. A green bond rated BBB- is much riskier than one rated AAA, although they are both labeled “green.”
Background Information: “Scopes” of Corporate Emissions
Scope 1 emissions refer to direct emissions from sources that are owned or controlled by the organization, such as emissions from combustion of fuels in boilers or vehicles.
Scope 2 emissions refer to indirect emissions from the consumption of purchased electricity, heat, or steam by the organization.
Scope 3 emissions are a broader category of indirect emissions that are not covered in scope 2 and include emissions from the entire value chain, including raw material production, transportation, and disposal of products.
Scope 4 emissions are not part of the original Greenhouse Gas Protocol framework but are sometimes used to refer to additional indirect emissions that can have a significant impact on the environment, such as emissions from investments or the supply chain of suppliers.
Disclaimer: The Content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.
References:
Climate Bonds Initiative (2020, December 15): https://www.climatebonds.net/2020/12/1trillion-mark-reached-global-cumulative-green-issuance-climate-bonds-data-intelligence
Fatica, S, Panzica, R, 2021. Green bonds as a tool against climate change? Business Strategy and the Environment; 30: 2688–2701. https://doi.org/10.1002/bse.2771
Flammer C., 2021. Corporate green bonds. Journal of Financial Economics 142(2):499-516.
Broughton, K. (2021, November 1). Companies Include Green Bonds in Larger Debt Offerings. Wall Street Journal https://www.wsj.com/articles/companies-include-green-bonds-in-larger-debt-offerings-11635776569?page=2
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