Green bonds represent a relatively new asset class that is designed to raise capital and investment for projects with environmental benefits. Just like regular financial bonds, the green bonds can be issued by banks, companies or governments. The issuer guarantees to repay the bond over a defined period of time, along with a fixed or variable return on investment. The market for these environmentally-focused bonds appears to be developing rapidly, with money managers jumping in to purchase them.
The sale of green bonds tripled to $35 billion globally in 2014. Participants are keen to avoid an impression that green bonds are merely a marketing ploy. SEB AB, the Swedish bank, which is the world’s largest underwriter of green bonds, says it is important to demonstrate the intrinsic environmental value of these bonds to create a sustainable market niche. In any case, 2014 has seen significant success in this market with new issuers and new buyers.
On the purchase side, since July this year, Bank of America Corp, Standard & Poor's, and Barclays MSCI each have launched new green bond indexes. Furthermore, State Street Corp has filed a registration with the U.S. Securities and Exchange Commission to run what could be the first green bond index fund.
Abengoa Greenfield, a Spanish clean energy company, issued its first high-yield green bonds in September, which was an issue of 500 million euro. A representative of the company said that nine out of 10 of their projects qualify as green projects, and so it made sense to issue a green bond.
Orders for a recent $350 million green bond sale by Massachusetts exceeded $1 billion, like many other over-subscribed municipal offerings. The Metropolitan Water Reclamation District of Greater Chicago came to market recently with a $300 million green bond, with a coupon ranging from two to five percent.
While there is a need for an independent review mechanism to determine how ‘green’ these bonds are, investors and issuers are willing give this market time to grow and improve its standards. Calvert Investments’ chief investment officer for fixed income, Catherine Roy, said that she expects no slowdown in this market. Trillions of dollars of capital is still needed to address a wide range of environmental challenges, according to Roy.
Source: The Economic Times
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