Key points in a nutshell:
- Green bonds are specialised bonds used to finance environmentally friendly projects.
- They are issued by companies, governments, or other institutions, offering investors the opportunity to invest directly in sustainable projects and have a positive environmental impact.
- Various frameworks and certification procedures, such as the Green Bond Principles, ensure the proper use of funds for sustainable projects.
- In addition to green bonds, there are social bonds, sustainable bonds, sustainability-linked bonds, and blue bonds.
- radicant offers a sustainable bond fund classified as SFDR Article 9, meaning it is "dark green" and aligned with the UNs' 17 Sustainable Development Goals (SDGs).
1. What are green bonds?
Green bonds are specialised bonds issued by companies, governments or other institutions to finance environmentally friendly projects. Their primary goal is to promote investments in sustainable projects and technologies to combat climate change and create a more sustainable future.
Good to know: What is a bond, actually? A bond is like a loan given to a government or a company. The difference is that the bond can be traded.
Green bonds offer not only financial returns but also investments in environmentally friendly projects. With their focus on sustainability, they promote environmental and climate protection as well as social responsibility. Additionally, their growing popularity provides issuers access to a more diverse group of investors and potentially lower interest costs.
To ensure that the funds are genuinely used for environmentally friendly projects, green gonds must adhere to specific standards and guidelines. Various frameworks and certification procedures, such as the Green Bond Principles or the European Green Bond Standards aim to ensure that the emissions from green bonds are transparent, responsible, and traceable.
2. How do green bonds work?
Green bonds generally work in the same way as traditional bonds. The issuer issues a debt instrument to raise capital from investors. The difference lies in that the proceeds from green bonds are exclusively earmarked for projects with environmental benefits.
These projects can include renewable energy, energy efficiency measures, sustainable transportation, waste and water management, and other environmentally friendly initiatives. To prevent the misuse of green bonds, various mechanisms and standards are employed by issuers, investors, and independent entities:
- Green Bond Principles (GBP): The Green Bond Principles, developed by the International Capital Market Association (ICMA), provide a voluntary framework for issuing green bonds. They include guidelines for transparency, use of proceeds, reporting, and independent verification. Adhering to these principles ensures that the funds are genuinely used for environmentally friendly projects.
- External verification and transparency: To ensure the proper use of funds, many issuers have their green bonds independently reviewed and certified by third parties. Additionally, issuers of green bonds are often required to regularly report on the progress and impact of funded projects.
- Purpose-bound and active engagement: With green bonds, the proceeds are specifically allocated to environmentally friendly projects. An essential aspect to prevent abuse is dialogue with stakeholders, including investors, non-governmental organisations and the broader public.
It's important to emphasise that while these measures aim to reduce misuse of green bonds, they cannot guarantee absolute certainty.
3. How can I invest in green bonds?
Green bonds can be acquired through banks and brokers, just like traditional bonds. Many bonds have a minimum trading volume ranging from USD 1,000 to USD 100,000. If this constitutes too much concentrated risk, you can invest in exchange traded funds (ETFs) or dedicated investment funds specialised in green bonds. These funds pool investor capital and invest in a variety of green bonds. You can buy units in such funds and thereby indirectly invest in green bonds.
A tip for you: Another option at hand is to invest in radicant’s investment fund Global Sustainable Bonds. This fund invests in green, social, and sustainable bonds issued by companies and supranational institutions, such as development banks.
4. Green bonds vs social bonds vs. sustainable bonds: What are the differences?
Green, social, and sustainable bonds all fall under the category of "sustainable bonds." While they share similar goals, there are some differences – here's an overview:
- Green bonds: Green bonds primarily finance environmentally friendly projects and initiatives that contribute to combating climate change or improving environmental quality. Such projects can include renewable energy, energy efficiency, clean water, or sustainable agriculture.
- Social Bonds: Social Bonds aim to address social challenges and improve societal well-being. Proceeds from social bonds are used for projects that, for instance, provide access to healthcare, education, social housing, or poverty alleviation. Sustainable bonds are a broader term encompassing both green and social aspects. They combine both ecological and social goals and can finance various types of projects contributing to sustainable development. This could involve promoting renewable energy and improving working conditions in developing countries.
- Sustainable bonds: Sustainable bonds are a broader term encompassing both environmental and social goals and can finance various types of projects contributing to sustainable development. This could for example involve promoting renewable energy and improving working conditions in developing countries.
- Sustainability-linked bonds (SLBs): They are a type of bond where the interest terms are linked to the achievement of sustainability goals predefined by the issuer. Unlike green, social, or sustainable bonds that finance specific projects, SLBs focus more on the overall performance of the issuer regarding sustainability criteria. The interest terms of a sustainability-linked bond can be linked to specific performance metrics, such as reducing greenhouse gas emissions, increasing the share of renewable energy in the company's portfolio, or improving energy efficiency. Achieving these predefined goals can lead to a reduction in interest costs, while failing to meet the sustainability goals can result in increased interest costs.
- Blue bonds: A final form of sustainable bonds is known as blue bonds. These bonds can be considered as a subcategory of green bonds. The issuers of blue bonds – primarily governments and development banks – finance sustainable projects related to the earth's oceans and seas.
Note that the definitions and criteria for green, social, and sustainable bonds may depend on various standards and certifications, such as the Green Bond Principles or Social Bond Principles established by ICMA.5.
Conclusion: Green bonds
Green bonds are specialised bonds issued to finance environmentally friendly projects. They are primarily issued by governments, government-related entities, or multilateral units, with an increasing number of companies using these financial instruments to finance sustainable projects. They provide you with the opportunity to invest directly in sustainable projects and have a positive impact on the environment.
Moreover, green bonds adhere to specific standards and guidelines to ensure that the funds genuinely are used for environmentally friendly projects. Various frameworks and certification procedures, such as the Green Bond Principles or European Green Bond Standards, aim to ensure transparency and responsibility in the emissions from green bonds.
They have proven to be a crucial instrument for promoting sustainable development. Since their introduction in 2007, these standards have facilitated the financing of sustainable projects and have reached an impressive market size of USD 4 trillion. However, they still account for less than 10 % of all traded debt securities in the market, indicating that there is ample room for growth.
Ready to make a difference with sustainable investing? You're in the right place with radicant.
As Switzerland's first digital sustainability bank, radicant offers sustainable banking and investing – and it's worth it:
- Sustainable investing: radicant focuses on companies actively contributing to a sustainable future. We base our approach on the UN's 17 Sustainable Development Goals (SDGs) as an independent criterion. We also follow this approach for bonds, so only invest in bonds issued by entities that make a positive impact on sustainable development.
- Maximum transparency: You always know which companies are in your portfolio thanks to radicant's rating system. Furthermore, you learn about these companies' contributions to achieving the SDGs.
- Experts by your side: Our experienced portfolio managers ensure that your money is not only invested sustainably but also professionally – starting from an amount as low as CHF 1,000.
Another advantage: With radicant's carbon tracker, you can monitor your personal carbon footprint for every transaction you make, and gain insights into the ecological impact of your lifestyle. Additionally, you benefit from 1% interest on deposits up to CHF 25,000.
Ready to make a difference? Then open your radicant account in less than 5 minutes – digitally, easily and without any paperwork involved.
