What Are Green Bonds?
A green bond is like any other bond, except that the proceeds only are used to finance environmentally friendly projects. In the vast majority of cases, a green bond is backed by the full balance sheet of the issuer and ranks equally with other debt of the same seniority. So, all else equal, the risk and return profile of a green bond is the same as a conventional non-green counterpart.
The market only began around 2007 and remained fairly small until 2013, when we saw growth turn parabolic. That growth has, first and foremost, been driven by investor demand. From the very start, this has been an investor-driven market, and it's grown to where it is organically without explicit incentives from regulators. We expect that demand will only increase, particularly as there's greater awareness that sustainable investing doesn't mean sacrificing return. In fact, there's mounting evidence to suggest that it can lead to better investment outcomes.
Policymakers have also taken an interest in this space and want to see the market grow. There's a growing recognition that public finance is not going to be sufficient to fund the transition towards a low-carbon economy. And we see greater interest from issuers as well as they better understand the benefits of issuing green bonds. Green bonds can be an excellent way to fund sustainability initiatives and can be a very visible demonstration to the marketplace that an issuer is taking its sustainability issues seriously. So we have this ecosystem of issuers, policymakers and investors who all want to see this marketplace grow. We need to see more growth to get to where we need to be, but that need translates into investment opportunity as well.
Green Bond Issuers
The green bond market was really started by supranationals and development banks, so issuers like the World Bank, the European Investment Bank, and others. Because green bonds are really a natural extension of the work they do. They continue to have a very large role in the market and have played a very important part in developing the market. But over the past few years, we've seen new types of issuers come into the market, and it's really evolved into a very diverse opportunity set.
On the corporate side, we see utilities and power companies issuing green bonds to fund new renewable energy capacity. Here in the U.S., companies like Southern Power and Duke Energy have been active in the space, but it's not just utilities. Apple is actually the largest corporate issuer in the U.S. to date.1 They've issued green bonds to fund renewable energy and energy efficiency projects in their facilities, as well as throughout their supply chain. Their green bonds are also financing new technology that helps them capture, recycle and reuse scarce natural resources in their products.
Fannie Mae is also a very large issuer in the U.S. In fact, it's the largest issue of green bonds globally. Those bonds are financing efficiency upgrades in multifamily apartment buildings across the country, which directly translates into savings for tenants. We see sovereign issuance taking off as well, in a very big way. The Republic of Chile just issued its first green bond. And that is going to finance solar infrastructure and transportation projects in the country so they can meet their commitments under the Paris Agreement, including a target of becoming a net zero emitter of greenhouse gas emissions by 2050. The universe has evolved into a very diverse opportunity set that in many ways resembles a U.S aggregate bond benchmark. It's diversified, multi-sector and high-credit quality exposure. So, from that perspective, can fit very nicely and seamlessly into a core bond allocation.
1Climate Bonds Initiatives
2Climate Bonds Initiatives
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