How green is your bond?

Get the ins and outs of green bonds in this two-part series. Let’s start with the basics.

A green bond is a type of fixed income instrument that specifically and solely dedicates its proceeds to financing new or existing projects that advance environmental objectives. Issuers set the qualifying criteria for these green projects, and have used the bonds to finance initiatives in fields such as renewable energy, green buildings, wastewater management, energy efficiency and public transportation.

Unlike a debt offering from a company that presents its overall operations as environmentally friendly, green bond proceeds are ring-fenced on the issuer’s balance sheet, set aside for the exclusive purpose of financing one or more projects deemed environmentally beneficial. A green bond’s return, however, is backed by the credit of the issuer as a whole.

The green bond market started a little over a decade ago in 2007 with the AAA-rated issuance from two multilateral institutions: the European Investment Bank (EIB) and the World Bank. It gained momentum with the entry of corporate issuers in 2013. It further took off in 2014 with the establishment of the Green Bond Principles, a framework devised by market participants to bring greater precision to the definition of green bonds.

As it stands today, the green bond market is over US$700 billion outstanding, and the structure has increasingly gained traction and support from issuers and investors alike year over year. This is evidenced by the record green bond issuance in 2019 of approximately $235 billion, representing a 28% year-over-year growth from 2018.

BlackRock and green bonds

BlackRock is heavily involved in the growth of the green bond market. As of March 31, 2020, BlackRock held over $16 billion in green bonds for our clients, across dedicated portfolios and as a component of broader fixed income mandates. As an active market participant, BlackRock has been a member of the Green Bond Principles Executive Committee since its inception. We meet regularly with issuers, underwriters, public regulators, and clients to support this asset class.

To further the push for green, we have developed a proprietary green bond taxonomy that shades each BlackRock-labelled green bond on a scale of Very Light Green to Dark Green based on the bond’s intended use of proceeds, associated environmental benefits, and its issuers’ ongoing commitment to allocation and impact reporting. We have built and actively maintain a BlackRock labelled and shaded green bond universe. Find out more about our green bond tagging and shading methodology in the November 2019 BlackRock Investment Institute Global Insights publication here.

Different types of return

So what is the big deal about green bonds?

Green bonds provide a means for investors to help issuers fund projects that put the world on a long-term path towards a zero-carbon economy. The investment opportunity provides some intended financial return for the investor, but it also creates another dimension of return. That is, non-financial return in the form of positive externalities for the environment. A positive impact on the world.

As a fiduciary to our clients, we want to be sure that green bonds deliver on their intended environmental benefits. Thus, we demand detailed and transparent reporting on the results of the funded projects from issuers and have built a framework for portfolio-level green bond impact reporting. In our five years of experience in tracking the positive environmental results of green bonds’ funded projects, we have developed a robust set of indicators based on issuers’ disclosed information. These include carbon emissions avoided, renewable capacity installed, and energy savings, to name a few.

In part two of the series, you can read about key insights into our process of tracking the impact of green bonds at a portfolio level.

Emily Weng is a member of the Global Fixed Income Responsible Investing team.


[1] In this exercise, we capture a representative majority but not all of the hypothetical portfolio’s impact. There are 228 issuers represented in this portfolio, who together have a total of $529 billion in green bonds outstanding. Of these issuers, 79%, representing 91% of total assets, reported on environmental impact in 2019.

Investing involves risks, including possible loss of principal.

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