We call green bonds, or green bonds, fixed-income securities issued by States, public entities, international organizations and companies, in order to finance projects that benefit the environment. This is the definition proposed by the International Capital Market Association (ICMA), headquartered in Zurich. The Green Bond Principles proposed by the latter require that a detailed report be published annually by the issuer of each green bond to report on the nature and progress of the associated ecological projects.
A rapidly growing market
The first green bond was issued in 2007 by the European Investment Bank, the lending arm of the European Union. Growth was slow at first, but since 2015, boosted by the signing of the Paris Climate Agreement and the adoption of the UN Sustainable Development Goals, the global market has grown by an average of 60 % per year.
According to the Bloomberg agency, new issues reached 440 billion euros last year, and this figure is expected to climb to 600 billion in 2022. More than two thirds of the funds raised are allocated to the energy and construction sector. , estimates the organization Climate Bonds Initiative. This rapid progress should continue, as climate plans, both state and corporate, are multiplying.
How it works?
ICMA defines good practices to be observed, but these are only voluntary principles. There are no mandatory international standards. Thus, an issuer can set its own rules and it is up to the buyer to do his analysis.
For an investor, in addition to its sustainable nature, the main advantage of this financial instrument is to benefit from a fixed income offered by the bond. If we compare the yields of green bonds with those of traditional bonds, they are practically identical. A good example is the green bond issued by Germany in 2020, of the same duration as its traditional equivalent issued at the same time: the yield difference between the two bonds is less than 0.05%.
Check issuer rating
It is possible to buy green bonds either directly on issue or on the market, via your bank, or indirectly through dedicated investment funds. Depending on the issuer, these bonds are traded in minimum tranches of 1,000 francs or more. As with any other bond, you should never forget to check the issuer’s rating, which determines its quality. Good liquidity is also essential. The investor must realize that the longer the duration of the bond, the more its price will be sensitive to changes in interest rates (if rates rise, bond prices fall and vice versa).