Why companies are using green bonds

The issuance of green bonds has grown at an exponential rate since their introduction in 2007. In 2015, USD41.8bn worth of green bonds were issued. The issuance has since increased sixfold to USD257.7bn in 2019. It is clear that issuance of green bonds, and other sustainability linked bonds will continue to grow, though they remain completely overshadowed by the total amount of outstanding bonds, estimated at USD128.3tn in August 2020, compared to USD891bn of green bonds.

Green bonds are defined and regulated differently depending on the market. The International Capital Market Association provides Green Bonds Principles, which most green bonds follow, as well as a high-level overview of different green bond regulations.

The most notable advantage of green bonds is the tax incentive that comes with it in several markets. Other advantages include a quantitative increase in visibility regarding green initiatives. Bond issuers can also increase their investor base, and more easily measure and track their sustainability transition. Alignment with future regulations and setting a legitimate track record for sustainable investing are factors that may offset the higher cost associated with the regulatory cost of issuing green bonds.

In August 2020 Visa became one of, if not, the first digital payment network to issue a green bond, according to Business Wire. Visa issued a USD500mn green bond paying a record low semi-annual coupon of 0.75% maturing in August 2027. The low yield is significant, especially when compared to other debt issuances made the same year. The proceeds will be used in accordance with Visa’s Green Bond Framework to finance up to 6 types of projects, including green buildings and energy efficiency. The framework aims to target UN Sustainable Development Goals 6, 7, 9, 11 and 12.

Though green bonds will play more and more of an important role in the financial sector, a study by the Bank for International Settlements, a club of central banks, has found that there is little concrete evidence that green bonds lead to decarbonisation. This is most likely because, as it currently stands, green bonds are being issued to refinance already green projects, or projects that would have existed without green bonds. The Climate Bonds Initiative estimated that USD597.7bn worth of bonds were climate aligned in 2015, though only 11% (USD65.9bn) were part of the green bond universe (as defined by the Climate Bonds Initiative).

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