Green bonds are a type of debt that provides investors with the opportunity to invest in projects that have positive environmental and climate benefits. These can include renewable energy, clean transport, waste management and climate change adaptation projects, among others.
As the need for sustainable finance continues to grow, green bonds are an increasingly important part of the market. They provide issuers with a way to raise money for environmentally friendly projects while also boasting about their sustainability publicly.
While green bonds have become a more popular option for investors, they can be a challenge to judge whether or not a bond is truly “green.” In recent years, regulators have started to develop standards that will help guard against greenwashing – a practice in which an issuer makes claims about its environmental performance that may not be true.
In an effort to ensure that green bonds are legitimate, the International Market Capital Association (ICMA) has created the Green Bond Principles as a voluntary framework for issuers and investors. The principles are designed to encourage transparency and disclosure, promote integrity and facilitate the development of the green bond market.
ICMA’s Green Bond Principles are endorsed by 162 institutions who have issued, underwritten or placed, or invested in green bonds as members and 127 organisations who are not yet in the market as observer members.
The first green bond was issued in November 2008 by the World Bank to raise funds from fixed-income investors to support lending for eligible climate-focused projects. Since then, the market has grown rapidly, fueled in large part by a rise in demand for socially conscious debt products.
These bonds are often backed by a number of other financial instruments, including covered bonds or asset-backed securities. They are usually issued under the jurisdiction of the country where the project is located, allowing the project to benefit from the country’s tax benefits and other incentives.
To boost the credibility of a green bond, issuers sometimes use a third-party verification or certification organization to verify that the project meets certain criteria. Several organizations, such as CICERO, Vigeo and the Climate Bond Initiative, are available for this purpose.
Increasingly, credit rating agencies and stock exchanges are developing further standards on the green status of securities. The emergence of credible standards is key to the development of a green bond market, especially in low and middle-income countries (LMICs) where projects have long-term investment horizons and secure income streams.
IFC has been an early issuer of green bonds, launching a Green Bond Program in 2010 and investing in 187 bonds in 20 currencies as of December 31, 2022. IFC has a strong commitment to the Green Bond Principles and contributes to their development as an Executive Committee member.
As a leader in the green bond market, IFC seeks to unlock capital for private sector projects that support renewable energy and energy efficiency. Through our green bond strategy, we aim to increase the availability of green bonds and catalyze sustainable growth in the global economy.