Green bonds: what they are and how they work

Eco-sustainable bonds are debt securities of companies that meet the ESG investment criteria for environmental protection, among the main sectors of sustainable finance: green bonds have 4 main characteristics and must comply with some internationally recognized principles.

green bonds

We are all a bit greener now, and the financial market could not be outdone. Reason why green bonds were invented in 2007: they are bonds associated with the financing of projects that have repercussions in environmental terms (energy efficiency, energy production from clean sources, sustainable use of land, etc.). Green bons were invented by an Italian, Aldo Romani, head of sustainability funding of the European Investment Bank. It was the EIB, on 4 July 2007, that issued the first green bond.

In the first fifteen days of September 2020, the highest monthly volume of green issues since the beginning of the year was recorded, i.e. 26 billion dollars. Globally, the green bond market amounts to about 650 billion dollars, in the Euro area in 2019 there was a growth of 50% compared to the previous year, up to 170 billion euros. After a “Covid pause”, the green bond market has started to grow again, a sign that ESG investments are better able to withstand crises than traditional investments, as already widely verified.

The 4 characteristics of green bonds

Green bonds have four characteristics that distinguish them from regular bonds:

  • the selection of the project to be financed
  • the proceeds must be linked to the selected project: the money must be deposited in a specific portfolio, or otherwise tracked by the issuer
  • at least once a year a report must be made regarding the use of the proceeds, to see the projects for which they are used
  • there must be the second opinion, that is, an external auditor in charge of certifying documents and objectives

The Green Bond Principles

The International Capital Market Association (ICMA) has drawn up the Green Bond Principles, that is, the characteristics that make a bond eco-sustainable. It is only self-regulation, so there are no sanctions, but it is the markets themselves that “sanction” those who do not respect the ICMA principles relating to green bonds, as the repercussions in reputational terms could damage the company.

The European Commission has developed specific standards for European green bonds. The main difference is the register of certifiers: whoever provides the second opinion must be registered on a list managed by ESMA, the institution that regulates the European financial markets.

You can also invest in green bond ETFs, which obviously respect the same ESG principles and guarantee the typical safety and diversification of ETFs.

Starbucks green bonds

A virtuous and profitable example of a green bond was provided by Starbucks. In fact, the US coffee chain raised one billion dollars in 2019 following the issue of sustainable bonds. The company’s goal is to shift the supply of coffee beans to sustainable producers and make its activities greener, two aspects that have attracted the interest of investors.

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