‘Green Bonds’ and What Makes Them Green

by | Sep 2, 2014

smart, lauren, trucostThere’s been a surge of interest among companies in issuing green bonds to raise capital to invest in renewable energy and other environmental improvement projects, helping them to achieve their sustainability goals. Proceeds from Unilever’s £250m green bond will go towards installing cleaner production facilities, while GDF Suez’s €2.5bn green bond – the largest issuance to date – will raise money for renewable energy and energy efficiency schemes.

The green bonds market is still tiny compared to other asset classes, but it is growing rapidly. More than $20bn of green bonds have already been issued this year, and the market is expected to hit $40bn by the end of the year, tripling the size of the market in 2013.

Green bonds promise to raise much needed money to invest in the transition to a sustainable, low-carbon economy by tapping into capital held by pension funds and insurance companies rather than relying on banks.

A barrier to the expansion of the green bond market is the lack of clarity about the environmental benefits achieved. A couple of valuable initiatives are trying to remove this obstacle by developing voluntary guidelines to ensure the credibility of green bonds. The Green Bond Principles, supported by two dozen leading banks, set out procedures for designing, managing and reporting on green bonds. There is also the Climate Bonds Standard to which issuers could seek verification by a third party. Other organizations such as Vigeo offer verification to their own criteria.

While these initiatives are welcome, we believe there is a need for much more robust and transparent quantification of the environmental benefits of green bonds.

The first step is to use conventional metrics to demonstrate benefits in terms of the reduction in tonnes of carbon or cubic meters of drinking water that a project supported by a green bond will create. The drawback is that it would still be difficult to compare a range of green bonds to see which could have the most environmental benefit – an important requirement of investors keen to ensure their money is being put to the best possible use.

Natural capital valuation provides the solution. By putting a monetary value on the environmental benefits proposed by a green bond, investors will be able to compare the market and pick one that best suits their needs. Issuing companies will get the feedback needed to help them design projects supported by green bonds that will make environmental improvements that are genuinely additional to business as usual. In general, the greater competition enabled by natural capital valuation could drive the whole green bond market forward towards the goal of a creating a sustainable, low-carbon economy.

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