Three challenges that may affect green bond issuance
More than a decade ago, the World Bank’s offered the first green bond and a blueprint for what is currently a $500+ billion market (watch a video on the history here).
In fact, green bonds set a new annual high in 2018, according to global law firm Linklaters, with more than $140 billion issued globally. This is 31% higher than issued in 2017. However, some say these environmentally friendly bonds come with challenges that may affect future growth.
Despite certain challenges, green bond issuance is expected to grow substantially in 2019. According to one report, the utilities sector may see a 30% increase in maturities in 2019, which could provide an opportunity for more green bond refinancings. A broader focus on climate change and sustainability will also drive green bond growth.
So, what are green bonds exactly? This type of bond secures funds for new and existing projects with an environmental conscious. This includes projects that mitigate climate change impacts — such as renewable solar and wind farms — or other projects relating to energy efficiency, habitat restoration, or clean water for example.
Green bonds provide investors with a way to earn tax-exempt income on sustainable or environmentally friendly projects. Typically, issuers of the bonds also stand to benefit by attracting new, ethically-driven investors.
This may sound great to environmentalists or renewable advocates but these bonds also present challenges. Here are three that currently stand out.
1. Muddy waters
The specifics of what aptly constitutes a green investment have been fairly open to interpretation. This means what qualifies as green to one investor may be in the black (or let’s say, muddy) for another, leading to uncertainty in the market.
As Amrita Ahluwalia, Capital Markets lawyer at Linklaters, summed up in a press statement: “Alongside increased activity, we are seeing increased debate around what constitutes a green bond, with various shades of green emerging. Investors want to ensure they are committed to projects that will make an environmental difference, so we may see the evolution of green bond markets as a result of active regulatory involvement.”
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