by Harriet Scandol
Many have heard the term ‘green bond’ but few can describe their purpose or their impact. We demystify the finance jargon and show how one Norwegian giant may be leading the way in sustainable finance.
What is a bond? And what is a ‘green bond’?
When an organisation issues a bond, they receive payments for that bond that can be used to invest in income-generating activities, typically over the course of several years. The issuer is obliged to repay the value of this loan with interest after an agreed period of time. Bonds come in all shapes and sizes, often with confusing or misleading names – ‘plain vanilla bonds’ for instance, evokes the delights of an ice cream store, but in fact refers to the most standard bond available.
Green bonds are issued specifically to raise funds to finance a ‘green’ project. These projects might range from renewable energy infrastructure, to a reforestation project, to drinking water facilities. Within green bonds, there are ‘climate bonds’, which assign funds specifically for mitigation or adaptation projects, and ‘sustainability bonds’ that target social and environmental issues simultaneously.
A decade of green bonds
The first green bond was issued by the European Investment Bank back in 2007. Their groundbreaking ‘Climate Awareness Bonds’ directed $690 million towards renewable energy and energy efficiency. In the decade since their inception, the value and distribution of green bonds has grown immensely. In 2017, new green bond issuances exceeded $150 billion, and forecasts for 2018 expect $210 billion.
A Norwegian Giant
Storebrand is Norway’s largest private pension fund and manages $84 billion. It is fair to say that when this giant takes steps, everyone feels the impact. The company’s asset management arm has the largest fund in the world purely dedicated to investing in green bonds. Amongst the investments made from the $460 fund is a backing of the World Bank’s first ever ‘Ocean bond’, aimed to accelerate progress towards life below water – SDG 14.
Thinking long-term
One potentially advantageous characteristic of bonds is their timescale. Typically bonds mature in around ten years, and the market is beginning to see bonds operating on even longer timescales. One of the challenges associated with financing solutions to challenges like climate change operating on such long time scales is that standard financial instruments are not equipped to deal with these long-term challenges. It remains to be seen whether green bonds can help to bridge the gap in climate finance, but one thing is for sure: if others follow behind the Norwegian giants, we may have a epic on our hands.
Interested in learning more about climate finance? Read The Sustainian’s dedicated market guide here.
Interested in the giants? Have a browse of Storebrand’s other work with sustainable finance, or check out one of their funds in more detail.