Financing Environmental Projects with Green Bonds
At the twenty-first Conference of the Parties to the United Nations Framework Convention on Climate Change (COP-21) convened last December in Paris, the nations of the Earth agreed on a new framework to address the challenges of climate change. Countries agreed to work towards limiting the increase of the Earth’s temperature to 2° Celsius by 2050 and to pursue the goal of restricting global temperature rises to no more than 1.5° Celsius above pre-industrial levels.
Many experts agree that slowing global warming depends upon the world’s transition to a “low carbon economy” in which renewable energy plays an increasingly important role. As energy remains the lifeblood of modern economies, this transition will require concerted investments in new technologies and an unprecedented deployment of capital throughout the world. Capital investments on a very large scale are needed to fund the acquisition and deployment of assets having environmental benefits including climate change mitigation and adaptation. Trillions of US dollars’ worth of investments in developing countries will add to investments already being made in developed economies to increase resilience, improve energy efficiency, and adapt to the impacts of climate change. Green Bonds have been identified by many in the investment community as an effective instrument for financing the transition to a low-carbon economy. Green bonds represent an opportunity to channel investment away from fossil fuel risk and into more sustainable infrastructure needed to support this transition.
The rise of environmental finance has been accompanied by calls for standards to ensure that bonds labelled as green meet minimum environmental criteria. Research has shown that investors reward green debt obligations with lower interest rates, and many recently issued green bonds have been oversubscribed. Concern that investors be protected from mislabeling prompted the International Capital Markets Association to draft its Green Bond Principles (GBP) to guide issuers making claims of environmental benefits for debt obligations. And in 2014 the Climate Bonds Initiative rolled out a standard which for the first time offered certification of individual green bond issuances.
Green bonds represent an opportunity to channel investment away from fossil fuel risk and into more sustainable infrastructure needed to support this transition.
The GBP have four components:
1. Use of Proceeds
2. Process for Project Evaluation and Selection
3. Management of Proceeds
4. Reporting
The focus of all is on transparency of information and data to provide enhanced credibility to the market.
As the need for environmental finance increases to meet the needs of a changing climate, issuance of green bonds will rise dramatically. Investors, government regulators and the financial industry itself all have a stake in ensuring the integrity of the green labeling process. Adherence to the green bonds principles by issuers, third-party assurance, and certification are protections designed to prevent misleading labeling and the violation of investor trust.
