Green Bonds – Not just for the Feel Good Factor

The proceeds of a Green Bond issue fund a range of businesses and projects, not just the more obvious renewable energy projects of solar and wind, but also those related to clean transport (such as electric vehicles), sustainable or energy efficient buildings or products, or water management and conservation. The use of funds not only drives the economy through new job creation and energy or product sales, but also achieves a climate or environmentally beneficial outcome.

Green Bonds were initially issued by multilateral development banks in order to develop socially beneficial projects and to support public policies around conservation and climate change. For example The African Development Bank’s US$500 million bond issue in 2013, to support climate change initiatives and development in Africa, the European Investment Bank’s EURO600 million climate awareness bond in 2007, which focused on renewable energy and energy efficiency and in 2008, the World Bank’s US$440 million bond to support climate change projects. Other multilateral agencies have followed, such as the Asian Development Bank and the Nordic Investment Bank.

Sovereign Green Bonds have also been popular, with countries such as Fiji, Poland, France, Netherlands, Chile and Indonesia issuing Green Bonds to fund renewable energy or climate change mitigation projects. In 2018, the Seychelles launched a “Blue Bond” to support sustainable marine and fisheries projects.

This month Namibia launched its first listed Green Bond of N$66 million (£3 million, approx.), financed by Bank Windhoek. Listed on the Namibian Stock Exchange, the proceeds from the bond are to fund renewable energy projects aimed at reducing the country’s carbon footprint. In June, Oslo Stock Exchange listed, Grieg Seafood, completed the issue of an unsecured listed Green Bond, raising NOK 750 million (£54 million, approx.) to be used for green projects, such as sustainability certifications, reducing carbon emission and supporting alternative feed ingredients.

In the United Kingdom, West Berkshire Council has launched the first ever local authority Green Bond in conjunction with social investing platform provider Abundance, to raise £1 million from local residents to fund solar panel installations on five council-owned buildings. The ability of residents to invest locally and assist with the green recovery is expected to be a growing and attractive investment alternative for retail investors.

For investors, Green Bonds can be a safe investment proposition, providing tax exempt income as part of a diversified investment portfolio. Green Bond investments are likely to also meet the targets of ESG investment policies of institutions, or for retail investors providing a “feel good” factor, with investors knowing that their investment is being used in the fight against climate change. Green Bonds are expected to become even more popular as younger investors emerge who are likely to be more engaged with “green investing”.

Green Bond issuers need to clearly define the project(s) and use of funds, or if the proceeds are to be used in projects which are yet to be identified, be able to clearly set out what the green project criteria is, how they will be selected and then be able to explain how the project will be monitored and what level of reporting will be made available to bond holders.

The process of issuers “green washing” their use of investment proceeds and investment story is being dramatically reduced by the emergence of international standards and reporting requirements, organisations such as Deloitte have accreditation in authenticating Green Bond credentials. Further, the International Capital Markets Association has published a set of Green Bond Principles (June 2018) which provide a guide to issuers on launching a Green Bond, set out reporting requirements and recommendations as to the appointment of an external auditor to report on the relevant project in the context of the “green principles” upon which the investment has been made.

In the UK, Green Bonds can be listed on the Aquis Exchange, London Stock Exchange-Sustainable Bond Market, Green Bond Segment, the TISE as part of “TISE Green”, or more widely across the Euronext market platforms as an “ESG Bond”. Equally, Green Bonds can be issued and traded privately.

While many of the Green Bonds issued to date have been for large renewable energy projects (solar and wind) the market is changing fast with many smaller renewable energy developers entering the market, requiring fast access to capital while wanting to preserve equity and capital growth for early stage investors. In addition, a range of small to mid-size green technology companies are emerging which will need access to capital to develop, grow and operate their environmental friendly initiatives, a Green Bond may be the answer.