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What are the benefits of issuing green bonds and the potential of the green bond market?

The benefits for issuers include investor diversification, closer engagement with investors, raising awareness for an issuer’s activities, and helping to build a market that helps mobilize private sector financing for climate-focused and environmentally friendly activities.

How do the Financial Characteristics of Green Bonds Compare with Regular Bonds from the Same Issuer?

In general, green bonds are priced very close to regular bonds.

The market price of green bonds is determined like any other bond in relation to market conditions at the time of issuance (often relative to reference bond rates). For dollar-denominated bonds, U.S. Treasury Bonds are the reference benchmark.

To compare a green bond with a regular bond would require the issuer to issue them almost simultaneously and with almost identical terms—including currency, structure, yield, and maturity. This is rare. It is generally accepted that green bonds are priced very close to regular bonds; that is, investors are not willing to give up return or pay extra for the green aspect of the bond and related reporting. However, observers of this nascent market point to growing demand and preference for green bonds by a growing number of mainstream investors. Anecdotally, investors in green bonds have been able to sell at higher prices than conventional bonds because of the rarity of green bonds. Depending on demand and supply trends in specific markets, differential pricing for green bonds relative to other bonds could emerge in the future.


If Green Bonds Raise Funds that Could Have Been Raised by Regular Bonds, What are the Benefits to Issuers?

The funds raised by the first green bonds could have been raised with regular bonds. Green bonds, however, allow issuers to reach new investors, making such issuers less dependent on specific markets. Green bonds also help raise awareness about issuers’ environmental programs.

Since most green bonds in the market today carry similar financial characteristics as regular bonds from the same issuer (that is, they are backed by the full credit of the issuer), one could argue that they offer limited benefit to issuers. However, reaching different investor groups is valuable to expand funding sources. In particular, green bonds have attracted investors from the growing segment focused on sustainable and responsible investing (SRI) and investors that incorporate ESG (environmental, social, and governance) criteria as part of their investment analysis.

In addition to reaching different types of investors, green bonds have proven to be an effective tool to raise awareness and open intense dialogue with investors about projects that help address climate change and other environmental challenges.

For example, issuers in state and local governments are using green bonds as a tool to reach constituencies physically located close to the green projects they intend to support. The opportunity to invest in a program that improves one's community increases one's sense of connection and social responsibility.

 

What is the Potential of Green Bonds to Raise More Capital?

There is an urgent need to transition to low-carbon and climate-resilient development and growth. Effective policies and more financing will be needed to achieve these goals. Green bonds could play a bigger role.

Globally, a transition to low-carbon, climate-resilient growth is needed to avert worsening consequences of climate change and natural resource scarcity. Public policy plays a key role in signaling the urgency of moving toward such a long-term goal. This includes avoiding price distortions (for example, reducing subsidies on fossil fuels) and applying policies that manage natural resources to reduce emissions, manage scarcity, and mitigate climate risk.
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IN CLOSING

With more than a threefold increase in green bond issuances in 2014 over the previous year, the green bond market’s growth and development has been impressive.

At a cumulative amount of almost US$60 billion, considering a total bond market size of over US$90 trillion globally, there certainly is room to grow.

To some, the total volume of the green bond market is less important than the variety of bonds being offered, the increased transparency around connecting the source of funding with the expected impact, and the role green bonds are playing in the overall transition to more sustainable and responsible fixed-income markets.

In sum, green bonds are not a “magic solution” to the climate finance challenge, but they are definitely moving market participants in the right direction. To reach meaningful scale and contribute to abating climate change, active public policy and continued private engagement will help green bonds reach their full potential.