A green bond is a tax-exempt bond which is issued by government organizations and/or municipalities for the growth of Brownfield locations. Brownfield locations are land areas that are not utilized efficiently, have abandoned structures, or are not sufficiently developed.
These bonds are created to facilitate the development of Brownfield locations. The tax-exempt status makes buying a green bond a very attractive investment when compared to a similar taxable bond.
Climate change impacts everyone. However, it is projected to hit developing nations the hardest. Its probable effects on the environment pose risks for the livelihoods of people in developing nations. At stake are recent gains in the fight against poverty.
Tackling this enormous challenge must include both mitigation and adaptation while maintaining an emphasis on its social magnitudes.
The World Bank launched the Strategic Framework for Development and Climate Change in 2008 to help stimulate public and private sector activity to tackle climate change.
The World Bank Green Bonds are an example of the type of innovation the World Bank is trying to encourage as part of the framework.
They provide an opportunity for a fixed income investor to invest in climate solutions through a high-quality credit fixed income product.
The triple-A credit quality of the Green Bonds is similar to any other World Bank bonds. The bonds were created in response to definite investor demand for a triple-A rated fixed income product that supports environmental projects.
A total of $42.4 billion green bonds were issued in 2015. The amount of bonds issued to finance low-carbon projects is estimated to exceed $50 billion in 2016.
According to Henry Shilling, Senior Vice President at Moody’s, “We expect the momentum from the UN Conference on Climate Change, as well as the signing of the Paris Agreement, to likely motivate additional and repeat issuance of green bonds.”
The green bond sector is still a small part of the overall bond market. Green bonds are not different from other bonds, but they must fund environmentally viable projects.
Commonly established standards on what constitutes a green bond and more transparency are required to make the market become more acceptable.
The financial market in London initiated a move in January 2016 to encourage pension and insurance funds to invest in green bonds, with an emphasis on developing a framework for the sector.