As the market for green bonds becomes increasingly attractive for investors, conversations are stirring about what it truly means for a bond to be “green”. 

Currently, the majority of outstanding bond proceeds are directed towards renewable energy projects. Others include real estate development, transportation efficiency, waste management and food security advancements. This is where the definition gets complicated. It’s difficult to measure the efficacy of green bonds because of the varying opinions surrounding what it means to be “environmentally beneficial”.

In 2014, Green Bond Principles (GBP) were revealed by the International Capital Market Association (ICMA) in conjunction with fifty other financial institutions as a means of providing standardized guidelines for green bond issuance. These principles aim to promote transparency and help investors make informed decisions about the impact of their green investments. 

Since the GBP were presented in April 2014, the number of green bonds issued that year tripled to reach a total value of $36 billion. As guidelines have improved, investor confidence has clearly continued to grow.

Quantifying Green Bonds

Where the Green Bond Principles aim to set qualitative guidelines, CarbonCount™ aims to provide a quantitative solution. The Alliance to Save Energy developed CarbonCount™ as a metric to quantify the amount of CO_² emissions reduced per $1,000 of investment. This method of measuring carbon savings delivers accurate, verifiable numbers to investors and issuers. It determines value based on a single metric — carbon dioxide emissions — as a means of standardizing how green a bond really is. Since this method is objective, its scores can be compared across diverse markets. 

Market Potential for Green Bonds

At this time, the green bond market is dominated by institutional investors. As these securities slowly and surely begin entering the retail market, there needs to be a more systematic way of validating their credibility. Since the GBP guidelines are voluntary, bond issuers and underwriters ultimately determine which shade of green their securities deserve. As retail investors lack access to information held by institutional investors, the need for simplified, transparent figures is increasingly important. 

More Than Just Financial Gains 

Green bonds maintain the same structure, credit risk, yield and rewards as traditional bonds. Their differentiating factor is that they specifically finance environmentally-friendly projects. Although the “greenness” of the bond is not tightly regulated, the investment in itself is structured just like any other fixed-income security. This means that retail investors are protected. 

The growing green securities market presents opportunities to fund solutions to issues that investors care about. The impact of green bonds goes beyond financial gains to incorporate the environmental and social returns that are too often ignored. Regardless of how quickly green bond regulations are enacted, these bonds have already started to influence the dialogue around energy efficiency and environmental issues.