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The market for green bonds is booming. But what makes a bond green?
Jul 5th 2014 | From the print edition Like 227 Tweet 351 Advertisement

OCCASIONALLY a market appears out of nowhere. So it is with “green bonds”,

instruments which tie the proceeds of a bond issue to environmentally friendly investments.
Issuers of green bonds raise money, promising to spend it on (for example) building wind
farms or less­polluting factories. In 2012 $3 billion of such bonds were sold. In the first six
months of 2014, the sum was about $20 billion, nearly twice as much as in 2013 as a whole.
All green bonds are investment grade; many have been two or three times oversubscribed;
half were issued by companies, a switch from 2013, when most green bonds were sold by
international agencies such as the World Bank.

Climate Bonds Initiative, a research group,

reckons the cumulative value of all green
bonds will be around $50 billion by the end of
2014. That figure is tiny compared with the
total size of the bond market ($80 trillion) or
the cost of reducing greenhouse gases
(anyone’s guess). But compared with most
streams of income for environmental
purposes, it is huge. This year’s issues will
be two or three times more than German
taxpayers will spend subsidising wind and
solar energy—the largest green subsidy in
Europe.

Markets may appear from nowhere, but they don’t appear In this section
from nothing. Green bonds are a case study not only in how
Not floating, but flailing
markets grow, but what needs to be done to keep them from
Capital punishment
imploding. Obviously, you start with willing buyers and sellers.
According to one estimate, 55% of pension­fund assets are Three’s a crowd
exposed to climate risks (including heavier regulation of dirty When Teflon wears off
Follow The Economist
industries); buying green bonds helps offset such risks. No Taking the economic pulse
surprise that Sweden’s public­sector pension fund was one of
If they build it
the earliest investors. Now, private asset managers are piling
Green grow the markets, O
in, too. Last November Zurich Insurance said it would buy $1
billion of green bonds, with the portfolio run by BlackRock, an Digital rumours

asset manager. Christopher Flensborg of SEB, a Swedish Beggar­thy­neighbour

banking
Latest updates »
bank that is the largest underwriter of green bonds, reckons
more than 250 institutional investors have bought at least one Reprints

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5/27/2015 Green grow the markets, O | The Economist

green bond, up from a handful two years ago. The largest

International football: FIFA in the dock
bonds—such as a $3.4 billion issue from GDF Suez, a utility Business and finance | 1 hour 42 mins ago
—are now big enough to appear in general bond indices. On July 1st Barclays, a bank, and
MSCI, an information firm, said they would launch the first green­bond index.
Pilot training: Psychologists required
Green bonds also attract new investors. When Unilever, a consumer­goods company, Gulliver | 1 hour 54 mins ago
issued a £250m ($416m) green bond in March, 40% of the issue was snapped up by people
outside Britain—an uncommon response to a sterling bond. Central banks and other official
bodies usually buy 75% of the African Development Bank’s (AfDB) benchmark bonds. But 10cc: Chorus lines
when the AfDB issued a green bond last October, asset managers, insurers and pension Prospero | 2 hours 13 mins ago

funds took over 70%.

Having more investors ought to make it easier for a company to sell bonds in future. There Remembering John Nash: Finding
is also evidence green bonds can sometimes outperform less colourful ones. Last year the equations to explain the world
yield on almost all South Korean bonds rose 0.6 percentage points in response to an Free exchange | May 27th, 03:43

outbreak of sabre­rattling by North Korea. But that of a green bond issued by South Korea’s
ExIm bank rose only 0.1 points. Green bondholders proved less skittish than others. The Economist explains: Rising oil
prices
A market needs standardised products. The World Bank has helped by proposing eligibility The Economist explains | May 26th, 23:50

criteria for projects financed by green bonds, deciding on a system for ring­fencing
proceeds to ensure they go to the right things and sketching out what sort of reporting and China's stockmarket: A crazy casino
Free exchange | May 26th, 18:51
compliance systems investors would need. Earlier this year 13 banks drew up a shared set
of principles governing different categories of bonds; 49 institutions have signed up.

Nonetheless, there is far from universal agreement over the question, “What makes a bond Spain's regional elections: Reluctant
partners
green?” At the moment the answer is, “If someone says it is.” At first, that someone was the
Europe | May 26th, 16:32
World Bank’s environmental department,
Next in Finance andwhich X most of
made sense when the bank issued
economics
the bonds. But something else was needed as corporate green bonds came along. Now More latest updates »
Bulgarian banks
independent groups Digital
have emerged
rumours to give second opinions, such as the Centre for
International Climate and Environmental Research in Oslo (CICERO), a group of Norwegian
What caused the run on two of Bulgaria’s largest banks?
academics. The market has grown so fast that CICERO has just announced a partnership
with four other academic institutions, including Tsinghua University, to increase capacity Most commented
(not coincidentally the first yuan­denominated green bond has just been issued). But
sometimes the opinion is that of the issuer
1
Fromitself: Toyota
the print this year
edition sold
Jul 5th a $1.75 billion bond
2014 Ukraine
(to finance sales of zero­emission cars) on its own say­so. The other battleground

The trouble with this sort of discretion is that different people have different views. Is
fracking green? Is nuclear power? The definition is likely to be tested further because a big
oil firm is working on a green bond to finance a carbon­capture and storage (CCS) scheme. 2 Israel’s foreign relations: Contra mundum

CCS is an important technology—but oil firms are, for the most part, seen as beyond the
3 Campus politics: Are calls to boycott Israel anti­
Semitic?
pale by greens. 4 Modi’s rule: India’s one­man band
5 Poland's presidential election: Swinging right
The market does not need a single definition of greenery. But it does need to strike a
balance between accepting anything (which would dilute the attraction of green bonds as
Advertisement
instruments to diversify climate risk) and being so strict that hardly anyone can meet the
criteria. It also probably needs a more systematic approach to environmental assessment,
nearer to a credit­ratings system. Without it, the helter­skelter growth of the past two years
could wilt like a rice paddy in a drought.

Correction: In an earlier version of this article we referred to Zurich Re as the company who would buy $1

billion of green bonds. This was in fact Zurich Insurance. This was corrected on July 4th 2014. Sorry.

From the print edition: Finance and economics

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