The case for sovereign green bonds

SUSTAINABLE investing, green finance and green bonds - these are "buzz words" used by governments, financial institutions and corporations around the world, but what do they actually mean?

Green bonds are akin to conventional bonds in many ways. Pricing, issuance structures and transaction costs are similar, and they are listed, traded and regulated in much the same way as other bonds. Like conventional bonds, green bonds are based on the creditworthiness of the issuer and are risk-weighted and credit-rated using the same methodology. The key distinguishing feature of green bonds is that issuance proceeds of green bonds are expressly allocated to new and existing projects which yield environmental benefits.

There are a number of factors influencing sovereigns' growing interest in issuing green bonds, including their commitments under the Paris Agreement (the world's first comprehensive and legally binding climate agreement adopted by 195 countries outlining the contribution required of each country to achieve global greenhouse gas emissions reduction targets), a potentially lower cost of funding (or easier access to lower-cost funding) and the perennial global need for sustainable infrastructure and energy project development and funding.