Green and blue bonds?
Projects eligible for green bond financing may include all eligible renewable energy projects, and projects eligible for blue bond financing may only include renewable energy projects that focus on marine and offshore renewable energy.
Blue bonds have emerged as a thematic bond that can facilitate capital towards Sustainable Development Goal 14 (life below water) not just through the use of proceeds, but also by making sustainable oceans-related investments more accessible to private and institutional investors.
Green bonds are a type of debt issued by public or private institutions to finance themselves and, unlike other credit instruments, they commit the use of the funds obtained to an environmental project or one related to climate change.
They work just like any other corporate or government bond. They are used to finance projects aimed at sustainable agriculture, pollution prevention, fishery and forestry, clean water and transportation, along with environment friendly water management projects.
Green bonds are a relatively new type of bond and differ from regular ones in that their proceeds are meant exclusively to finance green and environmental projects. As regular bonds, green bonds can be issued by different actors.
For example, the Seychelles' first blue bond includes a commitment to report annually on the use of funds and the impact of the projects. It was structured in accordance with the International Capital Markets Association's (ICMA) green bond principles and certified by the climate bonds initiative.
Green bonds are bonds issued by any sovereign entity, inter-governmental groups or alliances and corporates with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable. The framework for the sovereign green bond was issued by the government on November 9, 2022.
The credit risk of a GSS bond is identical to that of a conventional bond from the same issuer, and so tends to carry the same credit ratings, according to Sascha Stallberg, who runs a green bond fund at Nordea.
Green bonds can provide the means for banks to finance green investments. At the same time, we believe banks use their status as issuers of green bonds to other ends as well, particularly to demonstrate to stakeholders their own contribution to the transition to the low-carbon economy.
The bond previously paid annual interest of 5.7% for three years, so it has become less competitive. While you can earn significantly more interest with a normal savings account, if your cash being used for ethical projects is important to you, the shortfall may be worth it.
Who funds green bonds?
Investments in green bonds often come from institutional investors—entities like mutual funds, hedge funds, and endowments that can afford to invest large sums in debt instruments.
The leading issuer of green bonds among the largest banks worldwide as of 2022 was Industrial and Commercial Bank of China (ICBC), with green bonds issued amounting to around 7.54 billion U.S. dollars. The value refers to eight green bonds issued since 2017. Bank of America followed with the second largest amount.
Green bonds are commonly used to finance the following types of projects: Energy efficiency projects. Renewable energy projects. Pollution prevention and control projects.
Green bonds work similarly to a traditional bond issuance, except the funds are slated for use in energy efficiency, renewable energy, or other projects that meet certain sustainability requirements, often formalized in a green bond “framework” developed by the issuer.
Green bonds can help investors put their money where their values are. Much like investing in environmental, social and governance, or ESG, investments, green bonds have a mission built into the investment itself. Green bonds can also have tax incentives in the form of tax exemption and tax credits.
The interest earned on green savings bonds is not tax free like an ISA, but it does not mean you necessarily have to pay tax on it. In fact, most of us won't pay any tax on our savings. Whether you pay tax will depend on your personal savings allowance.
Cons. Sustainability Challenges. One of the primary challenges of blue bonds is ensuring the long-term sustainability of the financed projects. Many projects may not be self-sustainable and may require ongoing funding, which can strain government budgets over time.
Blue bonds provide the funds needed to develop and implement sustainable ocean projects, such as clean energy projects, offshore wind farms and wave energy converters, marine protected areas, sustainable fisheries and aquaculture, marine pollution prevention and clean-up, etc.
While blue bonds are currently in their nascence – and have a number of hurdles to overcome before they are adopted more widely – we believe they have the potential to play a key role in preserving our oceans, marine life and ultimately our planet. 1. Sources: OECD - Ocean Economy and developing countries.
Issuers issue these bonds for a longer period say ten years which may fail to offer liquidity to some investors. Also, green projects require a more extended period to deliver returns. Investors are reluctant to invest in these bonds because their credit rating is below AAA or AA.
What are the problems with green bonds?
These include inadequate green contractual protection for investors, the quality of reporting metrics and transparency, issuer confusion and fatigue, greenwashing, and pricing.
Like any other corporate bond, a retail investor can buy these through a broker. Indian corporates also issue green bonds in dollars and these are listed in foreign stock markets such as the New York Stock Exchange and London Stock Exchange.
While most green bonds are issued by banks, it is increasingly common for corporations to issue their own bonds. Big brands in the technology, utilities, automotive and consumer products sectors are among those that have done so.
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
High-yield or junk bonds typically carry the highest risk among all types of bonds. These bonds are issued by companies or entities with lower credit ratings or creditworthiness, making them more prone to default.
