The green bond revolution

gbi esg start up

Wealth DFM talks to Blackrock’s Cara Milton-Edwards about why green bonds are becoming increasingly popular as an investment vehicle in the ESG space

Wealth DFM: In your role as a Fixed Income Product Strategist covering sustainable investing, in which areas are you seeing the most interest from clients at the moment?

CME: I’m in a very privileged position where I talk to many investors about the range of fixed income solutions at BlackRock that incorporate sustainable outcomes. Of those conversations, one of the most regularly touched upon topics is green bonds. This is both from the perspective of how much the market has grown, but also the increased investor demand that we see for this asset class.

In terms of the market growth, if we look back to 2015, this was a market that had just $225 billion dollars of outstanding debt. At the end of 2020, that had grown to over a trillion dollars. We’ve seen huge growth in the market. However, alongside the size of the market, we’ve also seen an increase in the diversity of issuers.

I think that is really what has piqued investors’ interest. Ultimately the conversations become about what role can green bonds play within my portfolio.

Wealth DFM: What are the defining principles of a green bond?

CME: In some ways it’s easier to start by looking at what a green bond isn’t.

A green bond isn’t a bond issued by a green company. A green bond is a financial instrument whose proceeds are exclusively applied to new or existing projects with environmental benefits. When a green bond comes to market through primary issuance, there are four characteristics that have become the market standard. These are known as the Green Bond Principles.

These principles are: Use of proceeds: at initial issuance, understanding exactly what that green bond will be funding and ensuring that those projects fall within what are known as the Green Bond Principles’ eligible categories.

The second is that there has been a process for project selection and that there are clear, environmental, sustainable objectives of those projects.

The third is on reporting. The expectation is that all green bonds will report on an annual basis on the projects funded. Also there should be metrics available as to the environmental benefits that result from projects funded.

Finally, proceeds from the bonds should be separate – they should be ring fenced from other assets on the balance sheet and verified by a third party or an auditor.

At Blackrock, we’ve been part of this Green Bond Principle executive committee since 2014. These have become the principles that have set the standard in the market, but they also shape the market for the future. We’ve seen changes and we’ve seen them develop throughout time.

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