Sustainability is getting a helping hand from a very unlikely source, Wall Street. Thanks to the investing worlds’ new-found love for sustainability. Investment banks are backing novel investment opportunities called Green Bonds, with new issuances nearing $250 billion globally. This is in response to a growing need for corporates and consumers to address sustainability goals.
Green Bonds are generally classified by issuers for bonds that align with International Capital Markets Association (ICMA) Green Bond Principles. There are many positives that issuers can gain from Green Bonds, they highlight the corporation’s green business, positive marketing story and diversify their investor base to include ESG/RI investors.
Green Bonds are appealing to environmentalist and other people who generally shy away from financial markets, these bonds are earmarked to be used for climate and environmental projects at the same time backed by the issuer’s balance sheet. These bonds come with tax incentives, which make them attractive compared to taxable bonds. It is ideal for investors who want a safe place to put their money and know that they are making a difference.
PepsiCo earlier this week announced that it has priced the company’s first-ever Green Bond, raising a total of $1 billion in proceeds. PepsiCo’s 2018 sustainability report had delineated six priority areas where the corporation plans to focus primarily on to meet its sustainability targets. Reducing 35% of virgin plastic content in its beverage portfolio by 2025, 20% reduction of absolute greenhouse gas emissions across its value chain by 2030 and in high water-risk areas, PepsiCo aims to replenish 100% of the water it consumes by 2025. Green Bonds are an ideal solution for procuring funds to achieve these sustainability goals.
Closer to home at Kerala, Kerala Industrial Infrastructure Fund Board (KIIFB) has raised $250 million through India’s first green bond issue by a government entity. The funds could be used to promote non-conventional energy sources in the state.
Super sovereigns such as IMF and World Bank were earlier the largest issuers of Green Bonds. Whereas in recent years corporates such as SNCF, Apple and Engie have taken the mantle issuing bonds totalling billions of dollars.
Car manufacturers could benefit much from Green Bonds to develop technologies that meet CO2 emission targets, financing for building electric vehicle manufacturing facilities and installation of recharging points. Sadly, the opportunity is being underutilised. Only a handful of Green Bonds has been issued by car manufacturers like Toyota, Hyundai, and Volvo.
Since their introduction by World Bank in 2008 as Sustainable Development Bonds to fund development lending, the market for Green Bonds has grown exponentially. With its market poised to reach $1 trillion by the first half of 2021, the outlook seems positive. Although a minuscule part of the $100 trillion global bond market, the issuance of Green Bonds have risen more than 70% this year. With more corporates yet to enter as first-time issuers the market is likely to grow larger.