Green Bonds

A Green Bond is a type of fixed-income instrument that is designed specifically to support climate-related or environmental projects, such as energy efficiency, sustainable agriculture and environmentally friendly technologies. 
In 2008, the World Bank launched the “Strategic Framework for Development and Climate Change” to help boost and coordinate public and private actors to combat climate change. Within this framework, Climate Bonds (as they are also referred to) are one of the main innovations the World Bank is trying to encourage. This type of financial product was designed in partnership with Skandinaviska Enskilda Banken (SEB) to respond to specific investor demand for a triple-A rated fixed income that supports projects addressing the climate challenge. 

Starting from 2016, green bonds began to sprout, especially thanks to the action of Chinese borrowers, who accounted for more than a third of all issuances. According to the latest report from the rating agency Moody’s, the issuance topped 202.2 billion dollars in November 2019, making credible the goal of trillions for 2020.  
The main characteristics of these bonds are the following: 
  1. They are typically asset-linked and backed by the issuing entity’s balance sheet, so they carry the same credit rating as the issuers’ other debt obligations
  2. They come with tax incentives, such as tax exemption and tax credits, in order to make them more attractive. 
  3. Their status as “Green” is verified by a third party, such as the Climate Bond Standard Board and Certification Scheme, which classifies bonds which are in accordance with the 2 degrees Celsius warming limit agreed in the Paris Agreement.  

The Italian railway company ‘Ferrovie dello Stato’ is a perfect example of their usage. The company became the first Italian issuer of a Certified Climate Bond with its 7-year green bond. All the proceeds were used to refinance a loan provided to Trenitalia to procure up to 600 new passenger and freight rolling trains, which are 30% more energy efficient than the old stock. 
Finally, here are some interesting tables that show the allocation of proceeds (most of the green bonds are allocated in the energy and building sectors) and the countries with the largest issuance in 2019.
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Source: Climate Bonds Initiative
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