Green bonds, financial investments issued specifically to fund environmental projects, are on the rise and shaking up the financial sector’s role in creating a sustainable economy.
Like conventional bond issues, green bonds are loans made by governments, institutions, and private or public corporations that provide the borrower with external funds to finance investments in return for various interest rates and conditions. Green bonds offer investment opportunities with both financial and environmental returns by using these arrangements to fund low-carbon and climate change resilient projects.
As explained in The Conversation, the financial sector traditionally looks for low-risk investment projects with long-term stability, but our perception of risk and stability is changing. Environmental impact and climate change resistance are increasingly recognised as key operational risks to many investment opportunities, and the importance of socially responsible investment is growing as sustainability performance becomes more visible. In 2017, the Climate Bonds Initiative reported $221 billion of labelled green bonds contributing to $895 billion in climate-aligned bonds, a $201 billion increase from climate-aligned bonds in 2016. However, green bonds, like many new market-based tools, have their own growing pains.
Unlike more traditional investments like infrastructure, what exactly constitutes a green bond is not immediately clear. Their sharp rise in popularity in the last few years has not been regulated. Projects like the Climate Bonds Initiative and the International Capital Market Associations’ Green Bond Principles are working to define what a green bond is, what they should achieve, and how they should be issued. Investments need to reflect accurate values for sustainable outcomes, including the risk of crucial, overstressed resources like water, and strategic approaches to performance management.
It’s exciting to read about new ways to secure environmental outcomes, and exciting to contribute towards achieving them. But if green bonds – and more broadly, financial involvement in sustainable futures – really are changing financial sector priorities, we need to ensure investors and borrowers understand what smart investment in sustainable outcomes looks like.
Green bonds don’t just have the capacity to address risk and stability in a way that considers the long-term impact of climate change — they can also change the way we think about money and returns as well.