- Companies and countries are turning to green bonds to finance projects and reduce carbon emissions.
- The increasingly popular debt product is poised to grow as the SEC demands greater transparency.
- This article is part of the “Financing a Sustainable Future” series exploring how companies are taking actions setting and funding sustainable goals.
The sale of green bonds – a form of debt that funds renewable energy projects like wind or solar farms, for example – has entered another stratosphere in 2021.
Globally, green bonds generated record proceeds of $479 billion last year, well ahead of the $245 billion sold in 2020, according to Refinitiv data. And bankers expect the asset class to continue to break records as companies seek to cut emissions.
“They are here to stay,” said Anne van Riel, head of sustainable capital markets at BNP Paribas for the Americas. “Over the past couple of years, we’ve seen a lot of interest in the S in ESG, but now the E is front and center.”
Countries like India and Qatar are weighing their first-ever green bonds, while big companies like Apple have incorporated them into their annual capital-raising plans.
Investors, too, are demanding more green because they want exposure to companies that are leading the way to a zero-carbon economy.
These fund managers received additional support from the Securities and Exchange Commission last month. The market regulator has drafted a proposal ask public companies to disclose more information on their climate risks. It would require companies to provide more information, and greater transparency, to investors weighing a multitude of green financings.
Preparing for green bonds
But preparing a company for a green bond takes time. It must have projects considered green – such as renewable power plants – and often companies must appoint third-party observers to certify their projects as green.
Banks must also help companies establish a green bond framework that describes which projects are eligible for a green product and comply with the principles set out by entities such as the International Capital Market Association or the Climate Bonds Initiative.
It sounds tedious, but it can put a company in a good position as big investors from BlackRock to Vanguard are looking to park their money with companies that are doing their best to mitigate climate risk.
For example, Portuguese utility Energias de Portugal raised a €1.25 billion green bond in March to fund projects held by its renewable energy unit EDP Renováveis. Ana Carolina Oliveira, head of sustainable finance at ING, told Insider that demand for the bond was so great that at one point EDP secured more than €4 billion in orders from investors.
In such circumstances, borrowers can take advantage of this investor demand to get a cheaper interest rate on their green bond, which can make all the extra work worthwhile.
The EDP has also been prepared. It appointed Sustainalytics, which assesses the ESG performance of companies, to conduct an independent opinion on its renewable energy projects, and it chose ING to help compile EDP’s green bond framework.
“Companies that want to issue green bonds need to be prepared because there will be plenty of opportunities,” Oliveira said. “You just need to have your framework and third-party reviews ready.”
More and more companies are getting ready. Data from Refinitiv indicates that sales of green bonds rose from $37 billion in 2015 to $479 billion last year.
“The demand for green bonds still exceeds the available supply, but hopefully not for long,” Oliveira said. We’re starting to see a more diverse group of sectors issuing these bonds and investors want to invest in companies that are fundamentally committed to change.”