As corporations face increasing scrutiny from investors, activists and environmentalists, it pays to know and communicate about your company’s environmental sustainability activities and how to leverage these activities to manage reputational risk. Below are the four things to know about this rapidly expanding market at the intersection of finance and sustainability.
1. Green Bonds 101: Green bonds are debt instruments used to fund activities that benefit the environment, such as renewable energy projects (developing a wind farm, expanding a solar real estate project) and energy efficiency projects (retrofitting lights to LED across a city). Issuers include supranational organizations like the World Bank, corporations like Unilever and Toyota, state governments like Massachusetts and financial institutions including Bank of America, Citi and many others.
2. Interest is Booming: The growth over just the past few years has been exponential. From $3 billion in green bonds issued in 2012 to $14 billion in 2013 and now the first half of 2014 has already surpassed $16 billion. Bloomberg estimates that at its current pace, total volume in 2014 will surpass $40 billion by the end of the year.
3. Shift in Investors: No longer are specialist funds or public sector institutions like the California state teachers’ pension fund the lone purchasers of green bonds; they are being joined by larger fund managers, particularly as the demand for socially responsible investing grows. Individual investors can also take part – Calvert Investments launched a green bond fund to diversify a core fixed-income holding with a sustainable investment solution.
4. Criticisms Drive Increased Transparency: The demand boom in a young market has led to some critique about the lack of standards in the market – what does green really mean? In January of this year, a consortium of investment banks – including Bank of America, Merrill Lynch, Citi, Crédit Agricole CIB, and JPMorgan Chase & Co – came together to develop voluntary guidelines that recommend transparency and disclose information important to investors. The guidelines also promote integrity in the development of the Green Bond market by clarifying the approach for issuance. This is designed to help spur additional investments into green projects.
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