Description

Climate bonds can mobilize resources from domestic and international capital markets for climate change adaptation, renewables and other environment-friendly projects. They are no different from conventional bonds, and their unique characteristic is the specification that the proceeds be invested in projects that generate environmental benefits. In its simplest form, a bond issuer will raise a fixed amount of capital, repaying the capital (principal) and accrued interest (coupon). The issuer will need to generate sufficient cash flows to repay interest and principal.

Instrument category

Debt financing

Implementation status

Low - limited evidence available

Enabling conditions and success factors
  • Requires adherence to CBI Taxonomy.
Instrument benefits
  • Investor demand for green bonds is high.
  • Bonds support significant upfront investment into larger and longer-term investments.
  • Similar performance as regular bonds (including risk profiles).
  • Green bonds can help diversify the investor base.
  • Positive marketing outcomes for green bond issuers and investors.
  • Green bond preparation and issuance promote collaboration between different government departments.
  • Potential for longer bond tenors than traditional bonds.
Challenges and risks to implementation
  • Green bonds require public reporting of the use of proceeds and can involve other optional verification processes.
  • Green bond secondary markets are less developed than those for traditional municipal bonds.
  • As with regular bonds, prices fall when interest rates rise, and some green bonds are callable (meaning the bond must be paid off early).
References
https://www.sdfinance.undp.org/content/sdfinance/en/home/solutions/green-bonds.html
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