08 Sep The rise of green bonds as businesses look to finance their net-zero plans

Over 800 bonds have raised $245 billion since the beginning of this year. Green bonds have surged, with China leading the way as more investors turn their attention toward sustainable-focused bonds.

Green bonds raise funds for projects which deliver environmental benefits and an overall more sustainable economy. Green can refer to renewables, sustainable resources, conservation, clean transport and climate mitigation. The rise of green bonds follows from a record year in 2021 when issuance doubled from the previous year as nations recovered from the impacts of the pandemic. China continues to lead the global green bonds market this year, raising nearly $60 billion in green bonds. Elsewhere, Germany is the highest issuer in Europe, followed by France and the Netherlands.

The increasing emergence of sustainability-focused bonds

Green bonds may be the main sustainable bond category, but sustainability-linked bonds (SLBs) have witnessed significant growth in the last few years. SLBs are connected to ESG factors to financial performance via KPS and other science-based targets. While these bonds are relatively new, they are gaining further recognition as businesses tackle more obligations, regarding reporting and due diligence. Europe dominates this market, with over half of all SLBs issued in 2021 and the first half of this year. Europe now represents the biggest sustainable bond market worldwide.

Since 2021, governments and other financial and utility businesses have been responsible for the bulk of green bond issuance. Today, however, SLBS are being issued within a range of industries. While utilities and finance account for about 30% of SLB issuance, industrial, materials and consumer sectors comprise nearly 50%. These findings imply that businesses from multiple industries use bonds to finance their net-zero plans. The sustainable bond market is progressing as investors continue to focus their investment strategies on a more sustainable future.

Climate change remains a top priority as pressure rises on companies to take action on their climate pledges, and developments within Europe, such as the green taxonomy, are boosting confidence to invest in this space.

While the demand for ESG financial products is increasing, there are concerns about possible greenwashing, highlighting the importance of confidence in the market for green products. The sustainable bond market is under further scrutiny concerning the misselling of green investment, with plans to introduce the EU Green Bond Standard and other similar measures to hold businesses in the market accountable.

The International Energy Agency (IEA) has estimated we must invest 1.5% of global GDP annually to achieve net zero by 2050. A large proportion of this will come from public financing but added flows of private investment are required and green bonds represent a critical part of facilitating the flow of capital from investors.

For borrowers, sustainability-linked bonds will lower the cost of capital directly linked to sustainability issues. Issuers also benefit from an enhanced reputation by displaying commitment to sustainability and taking action on their words. Individuals and companies are motivated by the bottom line, and applying a financial benefit to reaching sustainability goals incentivise further progress.