Green bonds can help finance clean energy – as long as the projects they fund are transparent

·3-min read
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Ahead of hosting the climate change summit in Scotland later this year, the UK government appears keen to demonstrate its green credentials. So far it is not on track to meet its own carbon-free goals, but in a move that may well accelerate progress, it recently announced plans to release £15 billion worth of “green bonds” to fund environmental projects.

Put simply, green sovereign bonds are like any other bonds – a form of government borrowing from investors. The UK is offering a “standard” green bond, which can be bought and sold at any time, and also a type of green saving product, with a three-year fixed interest rate aimed at households. Anyone aged 16 or over with a UK bank will be able to invest anything from £100 to £100,000 in the scheme.

The idea is that the money invested is earmarked solely for projects that address climate change and other environmental issues. These might include initiatives such as developing low carbon buildings and transport, adapting to climate change and protecting ecosystems.

Importantly for investors, green bonds don’t carry the risk of the individual project, which is on the shoulders of those issuing the bonds, in this case the British government. For the green economy more generally, the bonds also signal government commitment to the cause, raising overall investor confidence in environmentally friendly investments.

It has become an increasingly popular way to raise funds. Green bonds now represent roughly 1% of the total bond market, and since 2016 the number of green bonds issued has been growing at an annual average rate of 60%. Last year, global cumulative issuance (supplying bonds) reached US$1 trillion (£725 million).

Most green bond issuers are private corporations, including Apple, Toyota, Unilever, and SSE, Britain’s second largest energy supplier. But an increasing number of national governments have been getting in on the act.

Poland and France were the first European countries to do so, and Germany recently issued a 30-year bond worth €6 billion (£5.1 billion). The US, Canada, Australia, and emerging economies such as China, Brazil, Chile and Mexico have also issued government backed green bonds.

The UK green bond scheme is likely to be one of the world’s largest, and may provide much-needed finance for environmental initiatives. But it is essential that issues of integrity, impact and transparency are properly considered so investors can be sure their bonds are funding projects that make a difference.

Including specific targets (and a measure) for projects, such as reducing carbon, is also important. Likewise, the duration of projects should align with the lifetime of the bond, so if a ten-year bond finances a five-year project, it needs to be replaced at that point by something similar.

Green shoots?

So how can investors in green bonds assess their impact in terms of contribution to climate mitigation? The UK’s “Green Finance Framework” – the system by which the bonds are issued – has been independently assessed using a widely adopted set of rules known as the “Green Bond Principles”. These provide an accepted benchmark for assessing the environmental integrity and possible impact of the bonds.

COP26 logo on screens.
A green meeting later this year. Shutterstock/rafapress

That impact on dealing with issues such as climate change will only become clear in the years to come. But for the moment, it is possible to take a positive view about the policy and its potential impact on what are essential projects: cleaner transport, more renewable energy and improved energy efficiency.

The bonds also send a clear signal about the UK’s broader commitment to its green objectives, which can help inspire additional investor interest in environmental projects. In terms of monitoring projects, the scheme will be open to scrutiny by investors and other organisations, including the media. People with green saving bonds can then actively assess the impact of their investments on the environment – while benefiting financially from a fixed and secure return.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The Conversation
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Catarina Araya Cardoso does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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