Principal ESG Academy - What is Green bond?

Investment involves risks. This information is for general reference only.

What is Green bond?

When you invest in a normal bond, you lend money to an issuer (e.g., company or government entity) for an “unspecified” purpose and the issuer pays a coupon in return. Green bonds work like regular bonds with one key difference: the money raised is used exclusively for climate and environmental projects, such as sustainable energy and environmentally friendly technologies.

Take the recently launched Green Bond by the Hong Kong Government as an example. Issued under the Government Green Bond Programme, these bonds allow local residents to participate in the green and sustainable finance market. They are used to fund nine types of projects that fight climate change and help transition Hong Kong to a low-carbon economy. Examples include energy-efficiency upgrades, waste reduction and recycling, clean transport and green buildings.

According to Hong Kong’s latest green bond report, US$3.5 billion raised from the two green bonds issued in May 2019 and February 2020 were allocated to 14 projects. Those include two plants in North Lantau and northern New Territories that use anaerobic digestion technology to turn food waste into biogas to produce electricity and compost. That can reduce an estimated 109,000 tonnes of greenhouse gases emission annually.

Globally, the green debt market demonstrated a rapid growth during 2020 to 2021, with market volumes increased by 75%. The average size of individual green bond rose from $165 million USD in 2020 to $250 million USD in 2021. The sustainable theme continued to attract new issuers, with the number of issuers rising by 32%.

Green bonds are growing in popularity

Three quarters (73%) of the 2021 green bond volume originated from developed markets (DM). However, green bond issuance in the Asia-Pacific region (129%) experienced the strongest growth. China, Japan, and Singapore were the top three largest country sources within the region.

Green bonds are still a small part of the massive global bond market, but they are expected to continue to grow exponentially. Global green bond market is set to reach USD 1 trillion by the end of 2022, as predicted by Climate Bonds Initiative.

Look at what the asset manager is doing from a corporate sustainability perspective. What is the firm’s ESG commitments? What recognitions have the asset manager/ parent company received in terms of sustainability? Is the investment firm a signatory to The Principles for Responsible Investment (“PRI”)? Does the firm utilize a centralized ESG governance committee that oversees different investment teams? If an asset manager is truly embracing sustainability, it should start from within.

In fact, more than 130 countries have set or are considering a goal of net-zero emissions by 2050. Achieving net-zero on a global scale, however, requires US$125 trillion in climate investment by 2050, according to research commissioned by the United Nations Framework Convention on Climate Change (UNFCCC). In 2021, the world spent US$755 billion on deploying low-carbon energy technologies, up 27% from the year prior. Sustainable finance is expected to continue to grow and there will be more investment opportunities in the future.

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