Name: How The $1 Trillion Market For ‘Green’ Bonds Is Changing Wall Street
Uploaded: 2021-05-29T02:00:36.000Z
Duration: 10 min 1 s
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When Rob Fernandez analyzes potential investments for

Adverbs of manner

clients, he looks at what exactly it means for an

We won't just buy a green labelled bond for clients just

More and more investors are interested in putting their

money to work in a way that will help combat the climate crisis.

And green bonds are the poster child of this kind of financing.

Environmental, social, and governance issues are here and

And some big household names are getting into this space, like

Apple, Pepsi, the New York MTA. Plus, a handful of massive

banks. Not to mention governments around the world,

like China, Russia, the EU and and more. This kind of bond

issuance may top $650 billion in 2021. That's about eight to 10%

of all the bonds being issued around the world.

They're a growing part of the marketplace. They're going to

continue to grow. And I think that's going to be a major part

So, there's a whole new bond market within the bond market.

Bonds as we know them work like this: An issuer, most often a

company or a government, raises money by offering bonds to

investors. They're basically IOUs, an exchange for getting

money up front, when you sell the bond, you pay the bond

holder back over a certain amount of time with interest.

Issuers use these bonds to raise money to invest in their

business, employees, infrastructure, anything you

The fundamental differences that it's about what it's financing,

Money raised from these are earmarked for projects that are

The one key difference is that the issuer makes a non-binding

voluntary commitment to earmark the proceeds and use them for

projects. So, it could be renewable energy, energy

efficient buildings, clean transportation, clean water, but

from a structure standpoint, they tend to be the same as the

traditional bonds that issuer would bring to market, minus the

The market here is bigger than just green bonds.

So, we saw last year about $490 billion of green, social and

sustainability bonds combined. This year, we're expecting about

$650 billion across those three categories.

Sustainable bonds break out into three categories: Green, social,

Social bonds would be used primarily for social purposes.

It could be affordable housing, or micro finance.

And the sustainability bond category here basically means a

bond meets both green and social standards of issuance. The

biggest slice of the pie goes to green bonds with an expected

In 2020, green bonds reached about $1 trillion USD at the end

So it's a huge diverse mix. Banks, corporates and

governments. Anyone issuing or the ability to issue a bond is

issuing, especially when they have the eligible assets to do

Most issuances so far have been considered investment grade.

That means independent rating agencies say those issuers are

most likely to repay their debts. The other side of the

bond market is more risky, often called high yield bonds or even

The buyers are the big pensions, the big asset managers. They are

the guys that really are putting pressure around the need for

more green investments. Retail investors are having a chance to

invest in muni green bonds, and that's not a common practice

I think that's going to be a major part of the bond market

where the retail investor can get some participation in that.

To date, it's been largely, you know, sort of a best practice,

document-driven market. But at this point, it's been a

regulatory light market for the most part. The green bond

principles, which are sort of a best practice document that was

put out by the International Capital Market Association.

For a green labeled bond, if the issuer is complying with the

principles, the green bond principles, then there's certain

parameters, certain guidelines they have to follow.

There's four core requirements that these bonds must meet, but

it's a non-binding voluntary commitment. First is use of

proceeds. It's basically the legal document that details how

the money raised will be used for green projects. And to

determine what's green, there's what's called a taxonomy.

The taxonomy's main objective is to help set the course on what

is green. You know, think of it as a dictionary or catalog of

The other core components include process for project

valuation and selection, management of proceeds, and

reporting. They're all interconnected. And essentially,

it advises issuers to keep up-to-date information on how

the money is being used and the project's environmental impact.

How are you going to manage the proceeds during the time of the

bond, you're going to use a tracking system or you're going

to ring-fence it, the proceeds? And of course, how will you

report on those is really the fundamentals on what the green

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How The $1 Trillion Market For ‘Green’ Bonds Is Changing Wall Street

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