Description

Fixed-income financial instruments (bonds) which are used to fund projects with positive environmental or climate benefits. They follow the Green Bond Principles stated by the International Capital Market Association (ICMA), and the proceeds from the issuance are to be used for the pre-specified types of projects.

Instrument category

Debt financing

Implementation status

High - much evidence available

Enabling conditions and success factors

• Requires adherence to CBI Taxonomy.

Instrument benefits

• Value-enhancement: The evidence suggests that the issuer enjoys significantly higher returns at the announcement, indicating investors' positive expectations of the green bonds' contribution to the shareholder value.
• Lower cost of capital: green bonds are suitable for raising capital in large-scale investment projects.
• Safety: green securities are considered safe financial instruments with low riskiness, as they can accurately predict companies' cash flows due to their fixed rate of return.
• Price: the pricing of green bonds is advantageous and generous due to their "greenium effect" - a premium for being a green financial instrument.
• Diversified and increased investor base: green companies are attractive to sustainable investors that can greatly diversify their shareholders' variety towards ESG.

Challenges and risks to implementation

• More expensive to issue than traditional bonds.
• Typically heavily oversubscribed by investors searching for sustainable investment options and relatively few green bonds issued each year.
• Lack of green contractual protection for investors, so-called greenwashing.
• The quality of reporting metrics and transparency is not always good.
• Issuer confusion and fatigue.
• Perceived lack of pricing incentives for issuers.

References

Case studies

Green bond for infrastructure financing in Cape Town, South Africa