Why green bonds could be key to fighting climate change

Finance has a role to play in confronting climate change, and green bonds could be one of the tools to do it. The idea behind green bonds is not complicated, but the application of this simple financial mechanism could be transformational.

Green bonds are fixed-income securities that are just like an ordinary bond, where you lend money to companies by buying the bonds they issue, and after some time, they pay you back with a little extra return. Green bonds are normal flat-rate bonds with a "green" bonus identity: all of the funds invested in them are used for funding projects that are environment-friendly and climate-responsible. At the same time, green bonds are attractive to investors not only because they're socially responsible, but also because they offer incentives such as tax exemption and tax credits.

There are several specific fields that deploy green bonds, including alternative energy, green buildings and infrastructure, water and waste management, nature-based assets, including land use, information technology, communications and several others. The World Bank and the international finance corporations have developed a set of rigorous evaluation standards to make sure that money pooled in green bonds goes into sustainable projects.

According to a report from Moody's ratings agencies, in 2017, green bond issuance has accounted for $161 billion worth of investments worldwide, which is a record high in history. That money went into clean energy projects around the world. And according to the World Bank, green bonds are getting more attention since people are interested in funding projects that are good for the environment and contribute to the Sustainable Development Goals.

Green bonds aren't just issued in developed countries. Developing countries like China are also catching up on their green bonds and investments development. In 2018, China issued $30 billion worth of Chinese green bonds, the second-highest total in the world behind the U.S. However, last year a report revealed some dubious green-washed projects in China, such as "clean coal," which tried to take advantage of the new market. China's Securities Regulatory Commission has responded by closing clean coal loopholes.

The result of all this is that billions of dollars are flowing to companies that use proactive strategies to combat climate change. This financial mechanism is hugely important in providing sizable capital needed to fuel those massive transformational projects, such as constructing solar infrastructure, upgrading electric grids, and decarbonizing supply chains. This is a trend that we need to continue, ensuring that we can transform the energy system and cut carbon emissions.