The science on climate change is now irrefutable, and the United Nations (UN) reports that “without action, the world’s average surface temperature is projected to rise over the 21st century and is likely to surpass 3 degrees Celsius this century—with some areas of the world expected to warm even more.” In an era marked by climate change urgency, green bonds have emerged as a beacon of hope. These financial instruments bridge the gap between profit and planet, allowing capital market participants to contribute directly to environmental solutions.
So, what are green bonds? Green bonds are a fixed income security designed specifically for the proceeds to be allocated to a project that has environmental benefits. Conventional bond proceeds are for general business purposes. Green bonds support environmentally friendly investments, for example, investment in sustainable infrastructure (clean transport), solar farms (renewable energy), reduction in energy consumption and emissions (energy efficiency), and many more.
Borrowers that issue green bonds use capital markets to access a variety of investors, currencies, and maturity tenors. Capital markets also support the growth of social bonds and sustainability bonds. Social and sustainability bonds are like green bonds as these both address the UN Sustainable Development Goals . However social bond proceeds focus on positive social outcomes and sustainability bond proceeds are for green and social purposes.
Green bond growth
Green bond securities are issued by governments, corporations, or multilateral institutions. The beginning of green bonds dates to 2007. The European Investment Bank issued the first green bond, a 5-year Eurobond in July 2007. Since then there have been over 10,000 green bonds issued in capital markets.
Growth in the green bond market did not increase until after the 2015 Paris Agreement and the establishment of the UN Sustainable Development Goals. The UN reports public and private climate finance may be required to raise US dollars 4.3 trillion a year by 2030 to avoid the worst climate change. Green bonds as part of climate finance have a significant role to play.
More recently, green bonds have been year on year growing more. From 2021 to 2023 green bond average yearly issuance was US dollars 600 billion. Now, green bond total issuance is US dollar 3.2 trillion. By comparison, the Climate Bond Initiative states that social bonds and sustainability bonds are respectively US dollars 0.875 trillion and 0.780 trillion. The size of green bonds to social and sustainable bonds highlights the urgency to combat climate change.
What sectors are driving the growth of green bonds?
The banking sector is the most frequent issuer with 21 percent of total issuance. Banks are active bond market participants and support global credit to borrowers through the intermediation process. Banks are an important party to facilitate the investment in projects that benefit the environment. Other financial organisations are at 18 percent of issuance, and utility providers at 12 percent. Agency and supranational issuers are both 7 percent each and these were main contributors to green bond issuance in the initial stages. Agency organisations represent governments worldwide and these must be seen to be leading climate change efforts.
However there are borrowers in other sectors that cannot as easily access capital markets to issue conventional bonds let alone green bonds. Conventional bond issuers incur fees for listing, underwriting, accounting and legal, credit rating, and other disclosures. Green bonds incur further costs, for example, fees for certification and transparency in the sustainability criteria. These fees can be barriers to entry for issuers in the capital markets.
Which countries are the largest issuers of green bonds?
Mainland China is the largest issuer by bond count at 17 percent. The Climate Bond Initiative reports that Chinese green bonds quality and credibility are increasing with 64 percent of trades included in the Climate Bond Initiative databases in 2023. Sweden is the second largest country at 11 percent and the European leader however Germany is growing more and is now at 8 percent with France at 7 percent. The United States has 8 percent, and Japan 6 percent. Australia represents less than 1 percent of green bonds, and is somewhat commensurate of its global participation in financial markets and economic output.
Green bond projects and Australian involvement
As stated previously green bonds proceeds must be allocated to projects that benefit the environment. According to Refinitiv data clean transport, climate change adaptation, eligible green projects, and energy efficiency make up 75 percent of use of proceeds for green bonds. Clean transport is the largest at 30 percent.
In Australia, green bond proceeds use has primarily been clean transport, energy efficiency, and green construction and buildings. NBN Co Limited and Queensland Treasury Corporation are the most active with 6 issues of green bonds each, and Westpac Banking Corporation is the most active of the Australian banks.
Listed property groups are an active sector with Investa, Lendlease, Stockland, GPT, Mirvac and Vicinity accessing green bond investors. Three Australian universities have accessed the green bond market four times. The demand for green bond investors is high. An example of this is the recent inaugural Australian Government green bond issue in early June 2024. According to the Australian Office of Financial Management the 7 billion 10-year green bond issue denominated in Australian dollars was 3 times oversubscribed and distributed to domestic and offshore investors.
Motivations to issue green bonds
There are a few factors driving motivations to issue green bonds. Demand from investors to allocate funds into socially responsible investments is one factor. Fund managers acting on behalf of their clients are continually searching for ESG investments.
A second factor is the standardisation of a green bond taxonomy. Early green bonds were subject to greenwashing accusations due to a lack of uniform regulation of what constitutes a green bond. However, now there are voluntary green bond principles developed by the International Capital Market Association encouraging frameworks and external reviews to increase transparency. These are supported by the Climate Bond Initiative and the China Green Bond Standards Committee, to name a few. A third factor motivating the prevalence of green bonds is a “greenium.” A greenium is a green bond issuing at a discount to a conventional bond with the same bond economics. This is a cost saving for an issuer. Conversely, this is a cost for an investor as it lowers the return on its asset comparable to a conventional bond.
In summary, green bonds channel capital directly to projects that benefit the environment. Issuers of and investors in green bonds contribute to efforts to combat climate change. Green bonds must continue to further increase in prevalence compared to conventional bonds and a global taxonomy must be agreed to give rigour to green projects and prevent greenwashing. Green bonds are and will remain vital to align financial goals of issuers and investors with environmental impact.
Understand the main elements of green finance
Understanding the fundamental components of green finance is crucial. Addressing climate-related risks and facilitating the shift towards a low-carbon economy represent paramount global challenges.
Accomplishing these goals necessitates collaborative efforts among international organisations, governments, and the financial services sector. Finance professionals can achieve comprehensive overview and understanding through the Certificate in Green and Sustainable Finance. The Certificate provides you with a comprehensive overview and understanding of the evolving Green Finance Sector and sustainable finance.
About Dr Chris Bell SF FIN FCBI
Chris Bell is a lecturer in the finance discipline to undergraduate and postgraduate students within the University of Queensland Business School. 
Chris has a research interest in bank capital market decisions and financial stability. He completed his PhD on the topic "Systemically Important Bank bond funding and implications for financial stability." Chris has 25 years industry experience as a banking, consulting, and risk professional.
Chris is a Senior Fellow of the Financial Services Institute of Australasia and a Chartered Fellow of the Chartered Banker Institute in the United Kingdom. Chris a former member of the FINSIA Queensland Regional Council, mentor under the FINSIA program, and is a Chartered Banker by Experience graduate.
