Green bonds: what they are and how do they work

Officially born in 2007, green bonds are financial instruments dedicated to sustainable projects with a strong "green" impact and are increasingly used by companies to achieve their ESG goals.
green bonds

Officially born in 2007, green bonds are financial instruments dedicated to sustainable projects with a strong “green” impact and are increasingly used by companies to achieve their ESG goals.

Investors around the world, faced with yields fully in line with other financial products, are showing a growing interest that has led to a doubling of issuance volume between 2020 and 2021.

What are green bonds

Green bonds originated with the aim of linking a bond instrument to climate change mitigation and energy efficiency improvement objectives.

Since then, the objectives have been gradually articulated, and today green bonds invest broadly in projects that have a positive impact on the environment, proposing efficient solutions to ensure sustainable development.

They have experienced an incredible growth rate in recent years, an unmistakable sign of the attention that public and private companies, as well as small and large investors, are showing with respect to sensitive issues that are increasingly on the agenda.

In 2021, $523 billion of green bond issuance was recorded, 75% more than the volume reached in 2020. For 2022, against a forecast of about 16 percent reduction in sustainable bond issuance, Green bonds continue to be the most popular, accounting for about 54 percent of the total amount of issuance.

Who can issue green bonds

The gradual assumption of sustainability issues in the agendas of governments and companies has made the spectrum of issuers broader.

While in the early days they were primarily an instrument proposed by international financial institutions, over time green bonds have taken over individual companies and municipal corporations, which issue them to support their green transition projects.

This is happening not only in the Western world but also in developing countries. Where the goal of achieving the sustainable development goals set by the United Nations (Agenda 2030) is equally pressing. Suffice it to say that in 2021, emerging markets issued $95 billion of green bonds, representing 18.1 percent of ESG 2021 issuance.

Green bond investments include:

  • energy production from clean and renewable sources;

  • sustainable land use;

  • zero-impact transportation;

  • environmental and biodiversity protection;

  • circular economy;

  • waste treatment and recycling.

Finally, green bonds also invest in all those areas of scientific-technological research that involve the areas just seen.

Green bonds and Europe

Green bonds are also an element in the (partial) financing of the NextGenerationEU. This is the €800 billion package launched by the European Commission to ease economic recovery after the pandemic crisis.

EU leaders are confident of raising through them 250 billion euros by 2026. Or about 30 percent of the entire plan.

As part of this, the European Commission issued the first tranche of green bonds on October 12, 2021, worth 12 billion euros. Here, too, demand was significantly higher than expected, with orders for more than 135 billion euros. A second tranche of 6 billion issued in spring 2022 saw orders of 13 times the supply.

These initiatives are in addition to the “Clean Energy for All Europeans” package of measures launched in recent years. The aim of it is to achieve the 2030 sustainable development goals on climate and energy. Scope in which they will play a leading role in supporting investments for the energy transition.

Read also: Energetic transition, Italy as energy hub for Europe and the Mediterranean: the scenarios

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