Investing in the future: How green bonds finance sustainability

Key points in a nutshell:

• With Green Bonds, you invest in fixed-income securities that transparently and specifically support environmentally and climate-friendly projects - a clear commitment to our future.
• The market for green bonds is growing dynamically and will continue to gain in importance due to global efforts to achieve climate neutrality and increasing demand for sustainable investment products.
• Investments in green bonds support sustainable development goals (SDGs) and offer investors the opportunity to combine market-aligned returns with a positive impact on the environment and society.
• radicant offers a sustainable fund “Global Sustainable Bonds” that is classified in accordance with SFDR Article 9, i.e., “dark green”, and is aligned with the UN's 17 Sustainable Development Goals (SDGs).

Definition and basics of green bonds - What are "green bonds"?

Green bonds are fixed-interest securities issued exclusively to finance or refinance projects with a positive impact on the environment and climate. The main purpose of these bonds is to channel capital into projects that support sustainable development. Examples of such projects are:

• Investments in solar energy projects, such as the construction of solar parks or the development of photovoltaic technologies.
  Projects to increase energy efficiency in buildings and industrial facilities through energy-efficient refurbishment or energy-efficient and renewable energy systems.
• Financing low-emission means of transport, such as electric bus fleets for local public transport or charging infrastructure for electric vehicles.
  Measures to protect forests and reforestation as important carbon reservoirs that contribute to climate protection.
• Exemplary projects that can be supported thanks to green bonds.

By buying a green bond, you are therefore indirectly supporting projects that help to mitigate climate change and protect the environment.

In contrast to traditional bonds, where the use of the proceeds is often not specifically defined, the proceeds of green bond issues must be demonstrably channeled into corresponding environmental projects. Investors use the financing to support environmental and climate protection projects and, in addition to a return in line with the market, also enable the achievement of sustainability goals.

Global market and issue volume – dynamic growth of green bonds

The market for green bonds has experienced dynamic growth in recent years and has become a significant segment of the global capital market. The issuance of green bonds is no longer limited to specialised environmental banks, but has spread across a wide range of public and private issuers, including governments, banks, and companies.

The European Investment Bank (EIB) was one of the first institutions to issue green bonds and has since played a pioneering role in the market. However, dynamic growth and an increasing diversification of issuers can also be seen in Switzerland.

Given the growing demand for sustainable investment products and global efforts to achieve climate targets, it is likely that the market for green bonds will continue to grow. Investing companies and private investors are increasingly recognising that financing environmental projects is not only an urgent sustainability issue, but also an economic opportunity. On the one hand, because they contribute to the development of new technologies and markets and, on the other, because advancing climate protection measures simultaneously reduces the impact of climate damage.

Green bonds vs. traditional bonds

Green bonds are similar to traditional bonds in their basic structure, as they offer a fixed interest rate and are repaid at par at the end of the term. However, the key difference lies in the use of the proceeds: green bonds only finance projects that have a positive impact on the environment and climate. This means that investors know exactly that their money is going towards sustainable projects, which is not always the case with conventional bonds. Such a green bond therefore offers an attractive alternative for environmentally conscious investors.

Green Bond Principles (ICMA) and certifications

The Green Bond Principles (GBP), developed by the International Capital Market Association (ICMA), are voluntary guidelines that promote transparency and disclosure in the issuance of green bonds. These principles serve to guarantee the integrity of green bonds by ensuring that the funds actually flow into projects with a positive impact on the environment and climate. Compliance with the GBP increases the certainty for issuers and investors alike that their bonds make a genuine contribution to sustainability and are not victims of greenwashing.

Core elements of the Green Bond Principles (GBP):

• Use of issue proceeds: The proceeds of green bonds must be allocated to specific projects that offer clear environmental benefits and whose impact is evaluated and, if possible, quantified.
• Project evaluation and selection process: Issuers must be transparent about how they select and evaluate suitable projects, taking into account social and environmental risks.
• Management of proceeds: Proceeds must be managed and tracked separately to ensure that they flow exclusively into the agreed green projects.
• Reporting: Issuers undertake to provide regular and detailed reports on the allocation and impact of proceeds and to disclose the methods and assumptions used to calculate project impact.
• Green Bond Frameworks: A framework that documents compliance with the four core components of the GBP and is easily accessible to investors.
• External verification: The recommendation to conduct external audits before and after issuance to certify compliance with the GBP and verify the use of funds.

Green Bond Principles (ICMA) and their core elements.

The importance of certifications and external ratings in the green bond market cannot be overestimated. They provide an additional layer of security and credibility as independent third parties verify compliance with the Green Bond Principles. This is crucial to boost investor confidence and ensure that funds are used as intended.

While the Green Bond Principles set the framework for transparency and integrity, initiatives such as the Climate Bonds Initiative go one step further to ensure an even higher standard and targeted climate protection projects.

Climate Bonds Initiative

The Climate Bonds Initiative (CBI) is an international, investor-focused non-profit organisation that aims to mobilise large-scale investment in a low-carbon economy. By developing standards and tools such as a taxonomy for climate bonds, the CBI helps to provide clarity and direction to investors. This enables their funds to flow effectively into projects that combat climate change and protect the climate.

The standards developed by the CBI are often stricter than the Green Bond Principles and therefore offer greater security and transparency. Certification by the CBI can be seen as a seal of quality for green bonds, as it guarantees compliance with the highest standards for environmental and climate protection. This contributes significantly to strengthening confidence in the market and increasing investment in sustainable projects.

Green bonds and their link to the SDGs

Green bonds play a crucial role in financing projects that contribute directly or indirectly to the Sustainable Development Goals (SDGs). By providing capital for projects in areas such as clean energy, sustainable cities and communities and climate action, green bonds promote the achievement of multiple SDGs simultaneously.

Your radicant account is more than just a bank account. With the radicant private account, every payment indirectly benefits the support of climate protection measures.

Types of green bonds

There are various types of green bonds, which differ in their characteristics and objectives. 'Use of proceeds' bonds, where the proceeds are allocated to specific green projects, are the most common form. Creditors of these bonds have access to the issuer's other assets in the event of liquidation. Other forms such as revenue bonds, project bonds, securitisation bonds and covered bonds vary in the way repayments are secured and how the proceeds are used.

Climate bonds are a special category of green bonds that focus exclusively on projects that reduce greenhouse gas emissions or mitigate the effects of climate change. This distinction is important to ensure that the investments have the greatest possible impact in the fight against climate change.

Green Bonds vs. Social Bonds vs. Sustainable Bonds: What are the differences?

While green bonds focus on environmental projects, social bonds target projects with a positive social impact, such as social housing or education programs. Sustainable bonds are a combination of both and finance projects that offer both environmental and social benefits. This enables investors to diversify their portfolios and tailor them to their individual perception of sustainability.

The development and spread of sustainability bonds shows the growing awareness of the need for a comprehensive approach to sustainability. Companies that issue these bonds take sustainability issues into account and want to create a positive impact through environmental or social projects. Sustainability-linked bonds allow companies that set themselves concrete targets and link the repayment conditions to their achievement, which creates additional responsibility and incentive.

Investing in Green Bonds

The world of green bonds opens up opportunities to drive sustainable development while generating financial returns. This form of investment appeals to both private individuals and institutional investors, who can invest in green projects via various channels such as direct investments, funds, or ETFs. The increasing demand shows a growing awareness of responsible investing and the importance that investors attach to the positive impact of their capital.

Investment opportunities

If you want to invest and are interested in green bonds, there are several ways to invest in this sustainable asset class. For example, private investors can access green bonds directly through their banks or invest in specialised funds and ETFs that hold a portfolio of green bonds. Institutional investors often have the option of investing larger amounts directly in individual green bonds, which enables them to focus their investments on specific projects or regions.

Overall, green bonds offer an exciting opportunity to invest in a greener future while benefiting from the advantages of a fixed-income investment. At radicant, we also offer you the opportunity to make such an investment, including with our SDG Impact Solution Fund.

Green Bond: radicant SDG Impact Solution Fund – Global Sustainable Bonds

With the radicant SDG Impact Solution Fund, we offer you an investment opportunity that pays off – in more ways than one. In addition to social bonds and sustainable bonds, our fund also invests specifically in green bonds that are classified by the ICMA. Around 33% of the fund is in “labelled bonds” or classified bonds. We steer clear of bonds from companies that oppose our objectives, and instead invest in projects that foster positive change in the world. These include renewable energies that support SDG 7.

We value transparency and report on the Principal Adverse Impact (PAI) indicators and the EU taxonomy. So you can see how your money is contributing to a more sustainable future.

Issuers of green bonds

The issuers of green bonds are as diverse as the projects they finance. They include international organisations such as the World Bank, which has already raised over 19 billion US dollars through green bonds for sustainability projects. European countries such as France, Germany and the United Kingdom also use green bonds to finance national and international sustainability projects.

In Switzerland, it is mainly banks and insurance companies that act as green bond issuers. However, cantons and public institutions, such as the city of Basel and the canton of Geneva, are also increasingly active in this market.

Green bonds in Switzerland

Switzerland has established itself as an important market for green bonds, with a total volume of almost CHF 11 billion. Companies such as PSP Swiss Property and institutions such as Zürcher Kantonalbank and the Swiss Confederation play a significant role in this market. According to the SIX Swiss Exchange, over one hundred green bonds with an aggregate nominal value of CHF 28 billion are currently listed. These bonds are mainly issued by banks, real estate companies and state actors.

Green bonds: Switzerland is an important market with an outstanding volume of around 11 billion Swiss francs.

The growing participation of cantons and public institutions also indicates that Switzerland has recognised the importance of green bonds as an instrument for financing sustainable development. This will not only further drive the development of the Swiss green bond market, but also contribute to the link between sustainability goals and public finance policy.

Challenges and future prospects for green bonds

The green bond market has developed rapidly in recent years, evolving from a niche investment to a recognised asset class where investors are increasingly looking at the purpose of their investments. Forecasts suggest that the green bond market could grow to €2 trillion due to record growth in new issuance, underlining the enormous potential of this market.

Nevertheless, green bonds face challenges, such as the lack of issuance by global reference issuers. The USA in particular, as the world's largest economy, has not yet issued any government bonds specifically for green bonds, which is seen as an essential step for the further development of the market. A stronger alliance between governments and the green bond market could be helpful here. Nevertheless, the future for green bonds looks promising, as awareness of environmental issues is growing and investors are increasingly looking for sustainable investment opportunities.

Conclusion:

Green bonds are more than just a financial investment; they are an instrument that gives us all the opportunity to invest in a sustainable future. By supporting projects that combat climate change and protect the environment, everyone can make a contribution. The decision to invest in green bonds is a decision for the good of our planet and future generations.

We are at a turning point where our financial decisions have a direct impact on the world we want to leave behind. It's time to take responsibility and invest in solutions that benefit humanity and the planet. Let's be part of this positive change by investing sustainably in green bonds.

Would you like to find out more about radicant's Global Sustainable Bonds fund or do you have further questions? Then arrange your non-binding and free consultation with our Client Service Team.

‍