What are green bonds and what are they for
Green bonds are financial instruments issued to raise capital for environmental projects. Essentially, they are fixed-income debt securities.
Green bonds are an element of the ESG (Environmental, Social, and Governance) philosophy, the global initiative that emerged in response to environmental concerns, such as global warming, the economic gap between rich and poor nations, and social injustice. For modern investors, compliance with these principles is a strong case to buy such securities. Issuers realize that and seek to embrace the ESG philosophy so that to become more attractive to investors and to raise as much investment as possible. Such an approach has become a ‘bon ton’ for companies and a sign that they do not ignore the current global agenda.
The concept of ESG comprises:
Environmental standards that show that the company cares of the environment and takes steps to reduce negative environmental impacts. A properly formulated ESG strategy implies sustainable consumption of natural resources, which has a potential to favourably affect the company’s bottom line.
Social standards that demonstrate the company’s attitude to people: its employees, partners, clients, and counterparties. This encompasses how the company cares about the health, safety and personal growth of its staff and the company’s responsibility to external customers for its products and services. A well-thought-out ESG strategy helps improve employee loyalty and employee performance.
Corporate governance standards, a measurement of management performance, protection of investors’ rights, and anti-corruption efforts.
Green bond principles
There are two institutions that develop green bond principles: Climate Bonds Initiative, an international not-for-profit organization that deals with issues of green investing, and the International Capital Markets Association (ICMA) that has developed the Green Bond Principles (GBP).
Green bond verification is the responsibility of external companies. Their role is to provide external assurance that the proceeds are really invested in green projects and that related reports meet all the relevant standards. This, however, does not release the issuer of its further responsibility to provide project progress and spending reports on a regular basis.
The green bond-related documents should clearly describe monitoring mechanisms to ensure the proper use of money and the environmental initiatives to be funded with the proceeds from the issuance of the green bonds. All of those projects must beneficially affect the environment and such benefits must be measurable. Profits from the sale of such instruments should be booked individually, either through a dedicated account or through a dedicated portfolio.
Who issue green bonds
The list of issuers conquering the green finance market is rather wide and includes private-sector and state-owned companies, municipalities, governments, supranational institutions, etc. Leading positions in this field belong to financial and manufacturing companies, as well as development banks. Since the last year, public institutions have been actively entering that niche, too.
The European Investment Bank (EIB) is a pioneer in the market of green financial instruments. In 2007, the financial and lending arm of the EU issued more than USD 807 million worth of bonds to raise capital for renewable energy and energy efficiency projects. Thus far, the EIB is the leader in funding climate change initiatives. In 2008, the suit was followed by the International Bank for Reconstruction and Development (IBRD) that issued its green bonds. Since then, that has become a trend for supranational institutions, development banks, and multiple companies across the globe.
According to Climate Bonds Initiative (CBI), by the end of 2020, the global green finance market reached the growth rate of approximately 95% and capitalization of USD 1 trillion. Among countries, leaders are the USA (that issued more than USD 200 billion worth of bonds), China (more than USD 127 billion), and France (above USD 115 billion).
Though the Russian market cannot, so far, match the markets in other countries, it is very promising. The first issuer who entered the market was Resursosberezhenie HMAO, a Russian company that issued green bonds for RUB 1.1 billion in 2018. The bonds were issued to raise capital required to build an inter-municipal solid waste landfill. Since then, such companies as MTS, Sovcombank, and Russian Railways have found their way to the green finance market. In particular, in 2019, the latter company issued EUR 500 million worth of bonds for the global market.
In the same year, Moscow Exchange, the biggest exchange in Russia, launched the Sustainability Sector for green bonds. The initiative went live in August 2019. The Sustainability Sector is designed for ESG-compliant securities. The sector consists of three independent segments: green bonds, social bonds, and national projects.
In 2021, Moscow issued sub-federal green bonds for RUB 70 billion, thus becoming the first Russian region to enter the market. That way, the Russian capital is going to support initiatives to reduce carbon dioxide and other pollutant emissions from motor vehicles. The City plans to replace petrol or diesel-powered public buses with electric buses and continue the development of the Moscow Metro system, including building the Big Circle Line. National Settlement Depository (NSD) acts as depository for the green bonds issued by the Moscow Government.
Managing Director for Depository Operations, NSD
“NSD is supportive of the ‘green’ and socially responsible investing approach. ESG transformation is one of our strategic priorities, and we are happy to implement the ESG principles together with our partners. The Moscow Government’s experience will point the right direction for other Russian regions.”
Minister of the Government of Moscow and Head of the Department of Finance
“Essentially, Moscow is shaping a new securities market segment in Russia by offering the first sub-federal green bonds and being actively involved in the development of the relevant regulatory framework.
The offering attracted high demand from securities market participants for the first Russian green sub-federal bonds. The issue size amounted to RUB 70 billion, while demand exceeded supply 23%, with 721 investor orders received for RUB 86.3 billion worth of bonds.
This showed that investors are interested in funding City’s environmental projects and demonstrated a great potential of responsible investment in Russia. Moscow is the trend setter here.
Not only has successful placement of the 74th bond issue for RUB 70 billion resulted in an increase in the volume of securities traded in the Moscow Exchange’s Sustainability Sector, but this also has reshaped the structure of the green bond market.”
Where to buy green bonds
Likewise other financial instruments, green bonds can be bought on exchanges or through a broker. They are available to both professional and non-professional securities market participants.
The issuance of green bonds is not an ordinary step for an issuer and causes a great excitement in the financial community; that is why relevant information could be found on dedicated industry-specific websites or in trade papers. If you want to stay in the know about green bond issuances, follow exchange news.
- Green bonds are financial instruments issued to raise capital for environmental projects.
- Green bonds are an element of the ESG (Environmental, Social, and Governance) philosophy, the global initiative that emerged in response to environmental concerns.
- The development of green bond principles is the responsibility of the following organizations: Climate Bonds Initiative, an international not-for-profit organization that deals with issues of green investing, and the International Capital Markets Association (ICMA) that has developed the Green Bond Principles (GBP).
- Green bonds can be issued by private-sector and state-owned companies, municipalities, governments, supranational institutions, etc.
- As of the end of 2020, the green finance market capitalization was USD 1 trillion. The USA is the market leader.
- In 2019, Moscow Exchange launched the Sustainability Sector for green bonds and ESG-compliant securities.
- In 2021, Moscow issued sub-federal green bonds for RUB 70 billion, thus becoming the first Russian region to enter the market.
- Green bonds can be bought on exchanges or through a broker. They are available to both professional and non-professional securities market participants.