Approaching Danger for Humankind
There is no doubt that global warming danger is getting closer day by day. Global warming's effect is not only on the temperature; it also affects the precipitation patterns, sea levels, agricultural production levels, water sources, glaciers and even the behaviour of the plant and animal. Needless to say, the climate change and global warming affects all the livings on planet earth. Does it really have to be like this? Well...Green House gases, especially carbon dioxide released into the atmosphere by human activity is one of the main reasons of global warming which ultimately triggers the heat and absorption of radiation.
Sure enough, treaties such as Kyoto Protocol have been entered into force to control the negative effects of global warming, yet none of those efforts are enough.1 On the other hand what is done is done and the only thing could be changed from now on is reducing the emission level of CO2 to the extent possible.2 In order to decrease the negative effects of industrialization, renewable energy sources must be used more than ever. This is where the green bonds, in other words, climate bonds come into scene.3
What is a Green Bond?
Green bonds like other traditional bonds are fixed-income financial instruments for raising capital through debt capital. The mere difference between a regular bond and a green bond is that the latter is issued for funding environment friendly projects. Therefore, green bonds attract new investors who are interested in climate friendly projects of all companies. So, what makes a 'green bond' different than a traditional one is that they are issued for funding projects bringing in environmental benefits, such as reducing CO2 emission. Green bonds offer investors and issuers the opportunity to invest their funds in favour of sustainable and climate-friendly investments. So, issuers have the opportunity to attract both the general investors and the potential investors, who are keen on environment friendly projects, and this makes a win-win case.
Who issues? What is the motive behind Green Bonds?
International financial institutions including World Bank, International Finance Corporation and European Investment Bank, the African Development Bank, the Asian Development Bank, the Nordic Investment Bank and the State of Massachusetts have all issued Green Bonds to provide financing for environment friendly projects. Lately, private companies have started issuing their green bonds as well to fund low-carbon projects.4 In 2014, $36.6 billion green bonds have been issued.
Obviously, the investors may invest both in traditional bonds or green bonds but why would they choose investing on traditional bonds if there is no burden for investing in green projects with green bonds? This is the motivation behind the popularity of green bonds. And as a result of this demand, green bonds are becoming more and more popular each year.
How do investors know which bonds are green?
How do investors know which bonds are green then? Well it is a green bond if the issuer says so. For example, Toyota has issued 1.75 billion USD valued green bonds last year. We call these bonds green because Toyota, the issuer company, has publicly announced that the funds collected from the investors by way of green bonds will be used to finance sales of zero-emission cars.
What will happen if the issuer does not keep the promise and use the funds for other purposes as collected from the investors to finance green projects? This is a unique issue about green bonds concept because not standard definition of what makes a bond 'green' established yet and there is quite an ambiguity on this particular matter. This is exactly where the issuers may face potential accusations of greenwash by the investors.5
In practice, independent groups are sought to render second opinions on green bonds to prevent the issuers facing a reputational risk of greenwashing.6 Thanks to those second opinion organisations which make the investors feel safer in deciding on their investments.
The Future of Green Bonds
Green bonds is a new technique to promote bonds by the companies. With this instrument, environment friendly projects are being financed faster and easier. This market is still in its infancy and still no regulations, rules and even solid definitions exist. Such lack of clarity and the existing grey areas are the main disadvantages of this technique. On the other hand, would applying strict rules to this technique be beneficial? We do not know the answer yet. However, strictly applied rules and inspection requirements might increase the costs of issuing green bonds, which may cause these bonds to lose their advantage against traditional ones.
Nevertheless, the green market seems to be a rising star in alternative financing techniques market and there is no doubt that we will be writing and talking about this concept more and more in the future.
1 The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change, which commits its Parties by setting internationally binding emission reduction targets
2 "Without concerted action to reduce greenhouse emissions, the earth could grow warmer by 4 degrees Celsius within this century." International Finance Corporation, World Bank Group. Available on: http://www.ifc.org/wps/wcm/connect/353c8f004325cabfa308ef384c61d9f7/Green+Bonds+March+2014+final.pdf?MOD=AJPERES
3 From now on, the terms climate bonds and greenbonds will be used interchangeably
4 For instance, in 2014, Toyota issued $1.75b green bonds to provide financing for future electric or hybrid cars.
5 Dictionary, C. (2002). Cambridge dictionaries online.
6 Such as Cicero. Centre for International Climate and Environmental Research http://www.cicero.uio.no/home/
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