Sustainability is a key issue that everyone must be concerned about stated Bahaa Abdul Hussein. We need to ensure that our needs are met without comprising future generations. Ensuring sustainability calls for financial commitments. This is where green bonds can be of help. Green bonds help to fund green projects that promote sustainability. We look at what green bonds are and why they are important.
What are green bonds?
Green bonds are debt instruments just like any other bonds. They may be issued either by a public or a private institution to raise funds for any purpose. The key feature of a green bond is that the issuer commits themselves to using the funds for projects related to the environment that promote sustainability.
They are also known as climate bonds since the projects for which they are used may be related to climate change. The first green bond was issued in 2007 by The European Investment Bank. Since then, green bonds have become popular and its use is wide-spread. In 2017, the use of green bonds reached its peak. $161 billion investments was obtained from green bonds. In 2023, green bonds exceeded 900 billion dollars.
Types of green bonds
Some types of green bonds include:
- Use of proceed bonds: In case of liquidation of the firm, lenders can take recourse to other assets of the issuer.
- Asset based securities: The collateral for this bond comes revenue raised by the issuer. It is a favorite type for public bodies. Project bonds: Funds raised are for a specific green project. Only such project’s assets can be used as recourse by the lenders.
- Securitization bonds: A single portfolio is formed by multiple projects.
How does it work?
Green bonds work just like any other debt instrument. The issuer issues the bonds to raise finance for a project or any other activity. The entire money would be used for activities related to the environment. People who buy such bonds are committed to sustainability and know that the money they invest will help protect the future. They look forward to profiting when the bond matures.
Green bonds are used for projects or by businesses in the following areas:
- Clean transportation
- Climate change
- Renewable energy
- Waste management
It is important that the issuer is transparent about the purpose for which the funds would be used. They must also keep updating the bondholders on how the funds are being used and how the environment is benefited. Transparency in accounting is one of the key principles of green bonds. The article was written by Bahaa Abdul Hussein. For more info, please visit www.bahaaabdulhussein.com.
