What are Green Bonds?

As the world increasingly focuses on addressing climate change and other environmental challenges, green bonds have gained popularity as a way for investors to align their financial goals with their values and contribute to positive change. Green bonds are a type of fixed-income investment used to fund projects that have a positive environmental impact. Similar to traditional bonds, green bonds offer investors a specified return and a commitment that the proceeds will finance or refinance sustainable projects, either in part or in full.

Green bonds are issued by public, private, or multilateral entities to raise capital for initiatives that contribute to a more sustainable economy and generate measurable climate, environmental, or other benefits. Projects funded by green bonds include renewable energy, energy efficiency, clean public transportation, pollution prevention and control, conservation, sustainable water and wastewater management, and green buildings that meet internationally recognised standards and certifications.

Key points:

• Green bonds are designed to support specific climate-related or environmental projects.
• Green bonds may offer tax incentives that enhance their attractiveness to investors.
• The term “green bonds” is sometimes used interchangeably with “climate bonds” or “sustainable bonds”; however, these are not synonyms.
• Green bonds are part of a larger trend in socially responsible and environmental, social, and governance (ESG) investing.

Understanding Green Bonds

Green bonds are specifically designed to promote sustainability and support climate-related or other environmental projects. They help finance a wide range of initiatives, from improving energy efficiency and promoting sustainable agriculture and forestry to protecting aquatic and terrestrial ecosystems. Additionally, they support the development of environmentally friendly technologies and contribute to climate change mitigation efforts.

Like other bonds, green bonds often come with tax incentives, such as credits and exemptions, making them more appealing compared to taxable bonds.

Green bonds are typically verified by a third party, which certifies that the bond’s proceeds will fund projects that deliver tangible environmental benefits.

Types of Green Bonds

While all green bonds are intended to finance environmental projects, their specific characteristics can vary based on the issuer, the use of proceeds, and the recourse available to bondholders in the event of a liquidation, among other factors. The following are some common types of green bonds available in the market.

“Use of Proceeds” Bonds

These bonds are dedicated to financing green projects, but if the issuer liquidates, lenders have recourse to the issuer’s other assets. They carry the same credit rating as the issuer’s other bonds.

“Use of Proceeds” Revenue Bonds/Asset-Backed Securities

These securities finance or refinance green projects, but the debt is collateralised by revenue streams collected by the issuer, such as taxes or fees. This structure is often used by states and municipalities when issuing green bonds.

Project Bonds

True to their name, project bonds are programmed for financing a specific underlying green project, meaning investors have recourse only to the assets related to that project.

Securitisation Bonds

These bonds pool multiple projects into a single debt portfolio, with bondholders having recourse to the assets underlying the entire set of projects.

Covered Bonds

These bonds finance a group of green projects, known as the “covered pool.” Investors have recourse to the issuer, but if the issuer fails to meet its debt obligations, bondholders can claim against the covered pool.

Loans

Financing for green projects may be acquired through secured or unsecured loans . With unsecured loans, lenders have full recourse to the borrower’s assets, while secured loans allow lenders to access the collateral.

Benefits of Investing in Green Bonds

Investing in green bonds offers several benefits for both investors and the environment. Below are why responsible investors in Australia are increasingly turning to green bonds.

Supporting Environmental Sustainability

Green bonds provide investors with a direct way to support projects that have a positive impact on the environment. By investing in green bonds, individuals and institutions can contribute to the transition towards a more sustainable future.

Financial Returns

Green bonds offer competitive financial returns similar to those of traditional bonds. Investors can earn regular interest payments and receive their principal investment back at maturity, all while knowing that their money is being used for environmentally beneficial purposes.

Risk Mitigation

Environmental risks, such as climate change and resource depletion, can have significant financial implications for businesses and economies. Investing in green bonds can help mitigate these risks by funding projects that aim to reduce environmental impact and promote sustainability.

Enhancing Corporate Reputation

For companies and institutions, issuing or investing in green bonds can enhance their reputation as responsible and sustainable organisations. This can improve stakeholder relations, attract environmentally conscious customers, and strengthen brand loyalty.

Portfolio Diversification

Green bonds offer investors a chance for diversifying their portfolios. As the market for green bonds continues to grow, they provide a way to gain exposure to sustainable projects across different sectors and locations.

Green Bonds in Australia

Australia’s efforts at promoting sustainable development have given rise to at least two green bond products.

Victorian Green Bonds

In 2016, Victoria became the first government in the country to offer investors green bonds. Verified by British nonprofit Climate Bonds Initiative, the Victorian Green Bonds issued by Treasury Corp Victoria had a combined value of $300m. When broken down by end-use, 78 per cent of the proceeds were allocated to upgrading the state’s transport system, including electrification of the railways. State Treasurer Tim Pallas said the Bonds are like a Triple-A government security with solid guarantee for use in ethical investments.

Green Treasury Bond

Recognising the growing importance of sustainable finance, the federal government introduced the Green Treasury Bond (GTB) in June 2024.

Issued by the Australian Office of Financial Management, the GTBs are designed to finance projects that will support Australia’s 2050 net-zero roadmap, overseen by a Green Bond Framework. The Federal Treasury will monitor the allocation and be in charge of impact-report analysis. Australian banks CommBank, Westpac, and NAB teamed up with Deutsche Bank and UBS as the GTBs’ Joint Lead Managers.

Although the GTBs were valued at $7 billion, they attracted over $22 billion in investment bids from over 105 investors in Australia, North America, Europe and Asia. They signed on after a two-month roadshow. The Bonds are slated for maturity on June 21, 2034 at a semiannual coupon rate of 4.25 per cent.

The Future of Green Bonds in Australia

The future of green bonds in Australia looks promising as more investors recognise the value of aligning their financial goals with environmental sustainability. The GTB is expected to drive further growth in the market, attracting both domestic and international investors.

For responsible investors, green bonds offer an opportunity to make a positive impact while earning competitive financial returns. As awareness of environmental issues continues to grow, the demand for green bonds is likely to increase, making them an essential tool for financing the transition to a sustainable future.

Conclusion

Green bonds represent a powerful way to care for the environment while achieving financial goals. In Australia, the growth of the green bond market, supported by initiatives like the GTB, provides a unique opportunity for investors to contribute to sustainable development. With investing in green bonds, responsible investors can support projects that address pressing environmental challenges and help build a greener future for Australia and the world.

DISCLAIMER: This article is for informational purposes only and does not replace official investment advice. BARTERCARD does not have working relationships with any company offering green bonds and are not stakeholders in any government-developed green bonds initiative. Please consult your financial advisor about legitimate green bonds.