- Companies and countries are turning to green bonds to finance projects and lower carbon emissions.
- The increasingly popular debt product is poised to grow as the SEC demands greater transparency.
- This article is part of the "Financing a Sustainable Future" series exploring how companies take steps to set and fund sustainable goals.
The sale of green bonds — a form of debt that funds renewable-energy projects like wind or solar farms, for example — entered another stratosphere in 2021.
Globally, green bonds raised a record $479 billion in proceeds last year, well ahead of the $245 billion sold in 2020, according to Refinitiv data. And bankers expect the asset class to continue smashing records as companies seek to lower their emissions.
"They are here to stay," said Anne van Riel, BNP Paribas' head of sustainable finance capital markets for the Americas. "In the last two years we've seen a lot of interest in the S in ESG, but now the E is the focus of discussion."
Countries such as India and Qatar are weighing their first-ever green bonds, while big companies like Apple have made them a part of annual capital-raising plans.
Investors, too, are demanding more green, as they want exposure to companies charting a path toward a zero-carbon economy.
These fund managers got some extra support from the Securities and Exchange Commission last month. The markets regulator drafted a proposal to ask public companies to divulge more information about their climate risks. It would force companies to provide more information, and greater transparency, to investors weighing a multitude of green financing.
Preparing for green bonds
But getting a company ready for a green bond takes time. It must have projects that are considered green — like renewable-power plants — and often companies must appoint third-party observers to certify their projects as green.
Banks, too, must help companies establish a green-bond framework that outlines which projects are eligible for green proceeds and comply with principles outlined by entities like the International Capital Market Association or the Climate Bonds Initiative.
It seems cumbersome, but it can put a company in a good position as big investors from BlackRock to Vanguard look to park their money with companies putting their best foot forward to mitigate climate risk.
For example, the Portuguese utility Energias de Portugal raised a 1.25 billion-euro green bond in March to finance projects owned by its renewable-energy unit EDP Renováveis. Ana Carolina Oliveira, the head of sustainable finance at ING, told Insider that the demand for the bond was so great that at one point EDP obtained more than 4 billion euros in orders from investors.
In circumstances like this, borrowers can leverage that investor demand to extract a cheaper interest rate on their green bond, which can make all the extra work worthwhile.
EDP was also prepared. It appointed Sustainalytics, which rates companies' ESG performance, to conduct an outside-party opinion on its renewables projects, and it picked ING to help compile EDP's green-bond framework.
"Companies that want to issue green bonds need to be ready, because there will be plenty of opportunities," Oliveira said. "You just need to have your framework and third-party opinions ready."
More and more companies are getting ready. Refinitiv data indicates green-bond sales grew to $479 billion last year from $37 billion in 2015. And bankers say borrowers are saving 0.05% to 0.1% in interest payments if they go green.
"The demand for green bonds still outstrips the supply available, but hopefully not for much longer," Oliveira said. We're starting to see a more diverse group of sectors issuing these bonds and investors want to invest in companies that are fundamentally committed to change."