Corporate green bonds are a tool to raise funds for projects that focus on environmental benefits and a more sustainable economy. The ‘green’ can refer to concepts such as corporate sustainability activities like sustainable resource use, clean transportation, conservation, renewable energy, and solutions to tackle climate change.
These kinds of bonds aim to drive sustainability and support climate-related and environmental-focused projects. For instance, The World Bank’s corporate green bonds have been utilised to support 111 projects across the globe – 33 percent in the renewable energy sector, 27 percent in clean transportation, and 15 percent in the agriculture and land use sector.
Characteristics of corporate green bonds
The characteristics of corporate green bonds are very similar to those of traditional bonds. They share the same risk, structure, and returns. Their credit quality ranges from non-investment grade to investment grade, but the vast majority are investment grade. The credit profile of a green bond is identical to a traditional bond from the same issuer.
When it comes to pricing, there is not a significant difference either. However, given the rapid growth of the global market, the liquidity of green bond issuers varies across regions and sectors. Therefore, some investors, particularly those operating in areas where liquidity options are more limited may have difficulty selling green bonds.
Benefits of green corporate bonds
There are plenty of advantages to corporate green bonds, which explains why they have seen a surge in popularity. The most obvious advantage is that green bonds allow individuals to boost much-needed natural capital.
Ultimately, they encourage sustainable investing and drive sustainable development. Green bonds may also offer some tax incentives, depending on the jurisdiction and the issuer, such as tax credits and tax exemption.
From an investor’s point of view, green bonds also result in higher transparency and accountability. In other words, because they require significant regulatory reporting frequently, there is increased transparency on the use and management of the proceeds. Therefore, green bonds can be an additional tool for managing risk.
Challenges and considerations with corporate green bonds
There are several challenges and things to think about when considering corporate green bonds. Firstly, they are not a cheaper option just because you will be using the proceeds in a specific way. In other words, whatever you decide to use the investment on will not alter your creditworthiness, especially not in the short term.
It is also important to keep in mind that money is fungible, and sometimes green bonds may finance company cars or national monuments. Hopefully, they do not, but you cannot rule this out if you do not see the full expenditure plan of the borrower before and after you lend. This kind of comprehensive reporting can be expensive and time-consuming too.
It is also not easy to determine the ‘impact’ of corporate green bonds, particularly when the proceeds of a bond can be displayed to increase a particular expenditure. Proper evaluations to ensure the spending has the desired impact take time and money, and results can be unavailable or disappointing. It is vital to understand that green bonds, just like any other bonds, have their benefits and drawbacks. All of this emphasises how beneficial corporate sustainability education can be for business owners and entrepreneurs to better comprehend how to invest for greener impact.
The future of corporate green bonds
Corporate green bonds could be the key to funding the essential transition to net zero. In this scenario, trillions of dollars would be expected to flood into the asset class to fund vital initiatives and projects.
According to The World Economic Forum, the green bond market continues to grow significantly, so we can hope they will remain a useful element in the drive towards sustainability, offering to finance innovative and important projects that can protect the environment around the world.
To deepen your understanding of green bonds, we invite you to enrol in our business sustainability course. This program meticulously explores the intricacies of sustainable finance, including an in-depth module on the subject, offering comprehensive insights and practical know-how.