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Green bonds as the brake on the accelerating climate change?

A summary of green bonds, their features and differences compared to Belgian government bonds.

The fast-paced growth of developing countries and their cities around the world, make it a true challenge to keep finding the much needed capital to fund their projects. On top of this, people are finally realizing the threat of climate change, hanging as the sword of Damocles above our head. Investing in a sustainable and climate-friendly way is recognized nowadays as a prerequisite to prevent global warming. Since 2008, the World Bank and the International Finance Corporation jointly issued $12.2bn in green bonds, showcasing their attractiveness as a new funding tool and their broad variety of possibilities to the investor public. Do these green bonds serve as the answer to the climate change? Or are they only a cover of firms’ continued unethical environment-related behavior?

The “green” in green bonds

An explanation of the concept

Green bonds are fixed-income financial instruments based on the exact same concept as normal bonds. They only differ in the fact that they are used to invest in projects with an environmental emphasis. These might be greenhouse gas emission reduction projects, climate change adaptation projects or entirely other environment-friendly projects.[1]   

As these bonds are actually theme bonds, they are pretty similar to a railway bond of the 19th century, a war bond of the early 20th century or a highway bond of the 1960s. The intended objectives are twofold. Firstly, they are designed to enable the investment in matters seen as socially important to their stakeholders that benefit from the same credit risk and return profile as standard bonds. Secondly, they provide a means for governments to direct funding to climate change mitigation. For example, this could be done through the subsidizing of the qualified bonds with preferential tax treatments, which is not yet implemented in Belgium, contrary to the Netherlands.[2]

This explains its booming popularity: the combination of financial and environmental return draws the attention of a lot of investors.


The rise and boom of the green bond

History of the green bond market

Green bonds were launched in 2007 by development banks such as the European Investment Bank, European Bank for Reconstruction and Development and the World Bank. Nowadays, a wide range of issuers exist: corporates, banks, Asset Backed Securities, regional banks and municipal issuers.

Since their first issuance, green bonds have known an exponential growth. The Climate Bonds Initiative, an international, investor-focused not-for-profit, is focused on mobilizing a $100 trillion bond market for climate change solutions. According to this institution, the market of labeled green bonds tripled in 2014 to a value of $36.6bn (coming from $11bn in 2013) issued by 73 different issuers. This took the total amount of green bonds outstanding to a value of $53.2bn by the end of 2014. Although the amount of issued green bonds has known an increasing trend since the beginning of 2015, the total amount at the end of June 2015 only adds up to $19bn, making it rather a challenge to reach the forecasted amount of $70bn and almost impossible to reach the best case amount of $100bn issued green bonds in 2015.


The tripling of the issuance was mainly caused by the overwhelming entrance of corporate and municipal bond issuers in 2014. Toyota demonstrated in quarter one of 2014, by issuing a $1.75bn green asset-backed bond, how proceeds from a bond backed by car leases and loans can be earmarked for future green vehicles.[3]  China and India, which are currently leading the way in climate-aligned bonds, are shifting towards labeled green bonds. By the initialization of green bond support, through interest rate support and tax incentives, these governments hope to raise huge amounts of capital to realize their ambitious plans to improve energy intensity, grow environmental industries and reduce environmental stress.[4]  

What makes a bond green?

Legislation and guidelines in a nutshell

The key question in the rise of the green bond was: “Who defines which bonds are entitled to be ‘green’ and what are the requirements?” In the past couple of years, a couple of institutions have come to light with an amount of guidelines. In January 2014, the International Capital Market Association launched the “Green Bond Principles”, updated as of March 2015, as voluntary process guidelines. The purpose is to recommend transparency and disclosure and promote integrity in the development of the green bond market by clarifying the approach for issuance of a green bond.[5]  The Climate Bond Initiative, the institution mentioned earlier, also has the goal to provide issuers, investors and underwriters with information by reaching out certificates. These make it possible to assess the environmental integrity of bonds claiming to address climate change mitigation and adaptation. A series of companies, among which CICERO, DNV and Vigeo, offer services such as the screening of projects eligible to funding through green bonds and the providence of independent verification of green bonds.

A worthy alternative

Comparing some green bonds with Belgian OLO's

On 12 May 2014, GDF SUEZ issued the largest green bond of 2014 with a total value of € 2.5 billion. This bond, designed to fund the process of energy transition and support the company’s strategy, was a major success as it was oversubscribed three times. As already mentioned earlier, the environmental purposes of a green bond can easily persuade a large audience of investors. Even bonds with a relative low coupon yield are being oversubscribed, such as the $1 billion International Finance Corporation issuance led by Bank of America, Citigroup and Crédit Agricole. The question is whether the financial incentives are equally persuasive.

With its average coupon amounting to 1.895% for a 9.1 years average, the green bond of GDF SUEZ is a very interesting financial product compared to the Belgian OLO’s. The latter only yielding an average yearly coupon for 5, 10 and 15 years of respectively 0.33 %, 1.34 % and 1.85 %.[6] Taking a look at the two largest issued green bonds of February 2015 worldwide, both yielding a coupon of 2.125% on 10 years, confirms that their yield is not compromised by their environmental return.

So the green bond is all good news?

A source of criticism and warnings

This seemingly revelation of financial markets to make a halt to the climate change, unfortunately has a seam side as well. Making out only 0,05% of the global fixed-income market and 0,12% of the estimated amount of capital needed to switch from fossil fuels to low-carbon sources of energy between now and 2050[7], it looks as if we still have an endlessly long way ahead of us. Furthermore, a lot of people are blindly attracted by this “green” label. Basically, these bonds would only be worth the label “green” when their proceeds are used to finance a project that otherwise would not be undertaken. Now, a lot of companies issue them to quickly and easily raise money for their projects, which they would have undertaken anyway.

In addition, investors should not fall for everything they are told by the marketing of companies. An upcoming phenomenon, called “greenwashing”, is on the rise. When a company or organization spends more time and money claiming to be “green” through advertising and marketing than actually implementing business practices that minimize environmental impact, it is greenwashing. A classic example is an energy company that runs an advertising campaign promoting a “green” technology they are working on — but that “green” technology represents only a sliver of the company’s otherwise not-so-green business.[8]

Unfortunately, the green bond’s pitfalls even extend to extrinsic dangers. Indeed, cyber criminals taste the extensive fraud possibilities that accompany the green bonds growth, hoping to profit from the dupable and inexperienced investor. In an alleged Ponzi scheme, investors were encouraged to liquidate their traditional investments, such as retirement plan stocks, bonds and mutual funds, and to borrow against their home or business, so that they could invest in one company's "green" initiatives.[9]   

A promising future for the green bond

Based on the current figures about the green bond market, one can conclude that these new financial instruments represent a game changing role on the market. Although their rationale and level of “greenness” can be questioned, they definitely make a better investment compared to the classic governmental bond. Making up only a minuscule part of the fixed-income market, they still have a long way to go, but when certification is made stricter, corporates and governments have a major opportunity to direct Earth to a more sustainable place. Raising considerable funds from fixed income investors to support sustainable projects has never been so easy for both private sector and governments. Additionally, from an investor point of view, benefits are not only financial but societal, making it interesting to couple such ethical initiatives with risk mitigation techniques of portfolio investment.

After all, green suits money so well. 

Sia Partners


[1] “Understanding Climate Bonds”, Climate Bonds Initiative, www.climatebonds.net

[2] In the Netherlands, the investment in certain ‘green’ financial instruments is tax free up to € 56.928.  http://www.belastingdienst.nl/

[3] “Year 2014 Green Bonds Final Report”, the Climate Bond Initiative, www.climatebonds.net

[4] “How to grow green bonds in China”, the Climate Bond Initiative, www.climatebonds.net

[5] “Green Bond Principles”, International Capital Market Association, www.icmagroup.org

[6] “Average interest Belgian OLO”, De Tijd, www.tijd.be, 13/07/2015

[7] “Energy Technology Perspective 2015 – Mobilising Innovation to Accelerate Climate Action”, International Energy Agency, www.iea.org

[8] “About Greenwashing”, Greenwashing Index, www.greenwashingindex.com

[9]Ackermann, M., “Beware of green investments”, Investment Management Weekly, New York, Jan 11, 2010

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