Finance climate action with green bonds

Companies will need to implement a range of levers to reduce emissions or adapt and build resilience to the impacts of climate change, which will be capital-intensive. For reference, to attain Net Zero by 2050, public and private sector entities across the globe will need approximately $3.8 trillion in annual investment flows through 2025 (1). Public, private, and blended capital can provide the financing needed for the spectrum of solutions. The term GSSS bonds (green, social, sustainable, and sustainability-linked bonds) describes the nature of a growing volume of bonds issued to raise funding from the market, by signaling that a company wants to invest in a particular type of sustainability activity. GSSS bonds are growing significantly as a percentage of overall bond issuance. According to the Climate Bonds Initiative, GSSS bonds represent around 5% of the overall bond market and their issuance reached $863.4 billion in 2022. Green bonds, defined below, are a subset of GSSS bonds, representing about half of the volume at $487.1 billion (2).

The perspective provided here is for corporate entities (issuers) leveraging green bonds to implement decarbonization projects.

Introduced by the European Investment bank and World Bank in 2007, GSSS bonds are issued by corporations looking to finance large sustainability initiatives with a measurable impact (3). Some exchanges, like the London Stock Exchange (4) and Euronext (5) are even creating dedicated listings for green bonds. These types of bonds allow financial institutions to align their debt strategy with their sustainable finance and investing commitments. Investor sustainability commitments currently outstrip supply, which has led to pricing benefits for bond (known as the green premium) (6). Beyond facilitating inexpensive borrowing from capital markets for companies with good core credit ratings, GSSS bonds allow companies to promote their sustainability narrative, benefit from investor diversification and reputation enhancement.

GSSS bond issuers must identify several key details: the project(s) the bond is financing, likely sustainability impact, and how impact will be tracked and audited. GSSS bonds typically involve several parties to underwrite, certify, and monitor the bond issuance (example for green bonds in exhibit below). GSSS bonds include: (i)

• Green bonds: Devoted to financing new and existing projects or activities with positive environmental impacts (blue bonds are a subset of green bonds that are debt instruments to raise capital for marine-based projects)

• Sustainability bonds: Used to finance or refinance a combination of green and social projects or activities

• Sustainability-linked bonds (SLBs): Linked to the issuer’s overall social/climate achievements (not linked directly to sustainability projects). Sustainability-linked bonds are target focused, as opposed to activity based. Progress toward selected sustainability performance targets results in a decrease or increase in the cost of financing. The proceeds can be used for general corporate purposes; the other categories are activity-based, meaning proceeds are used for specific projects

Beyond GSSS bonds, there are also Transition bonds, which are used to finance activities in fields that would not normally qualify for green bonds, like oil and gas, but allow the issuer to transition to less lower emissions in line with a 1.5°C scenario (7).

Figure 1: Green Bond Structure

Source: US Department of Energy. What are green bonds? (8)

Standards The Green Bond Principles (GBP), Climate Bonds Standard (CBS), and EU Taxonomy are the main standards for green bonds. The GBP are a set of voluntary guidelines for issuers of green bonds, whereas the CBS is a more stringent set of standards that focuses on climate change mitigation and adaptation. The EU Taxonomy, on the other hand, is a regulation that defines a list of economic activities considered environmentally sustainable. The EU Taxonomy is setting stricter standards that define what qualifies for funding from green bonds and establishing requirements for disclosure and reporting (9).

Other green financing options Beyond GSSS bonds, there are additional pools of capital companies can access to finance decarbonization investments. Illustrative green finance options are listed below. The above is mainly used for project financing (except for SLBs), meaning they’re used to finance specific projects, while the options below are exclusively for corporate financing, which is used to finance the overall operations of a company. It is also worth noting that green loans and notes are mainly private capital, whereas catalytic capital and climate financing often uses public investment.

• Green loans: Similar to green bonds in that they raise capital for green eligible projects (e.g., domestic solar panels, electric cars, energy efficiency projects), but typically smaller than bonds (10). They can be both bilateral, meaning they use a single lender, or syndicated, meaning there is a group of lenders

• Green notes: Promissory or structured notes used when green bonds may be too large an instrument for the company’s sustainability needs (see examples in the Usage section below where bonds are often multi-billion dollar/euro), while also providing some flexibility on the upper limit of monies that may be raised. These can be more accessible for retail investors (11)

• Sustainability-linked loans (SLLs): Like SLBs, SLLs are linked to sustainability performance targets, and do not require the borrower to target specific use of proceeds. Their use by corporates has grown significantly in recent years. (Financial institutions provide funding for SLLs, whereas investors or groups of investors subscribed to SLBs) (12)

• Catalytic capital: Often a blend of public and private capital (sometimes referred to as blended capital), it is designed to attract private investment toward climate projects through guarantees, credit enhancements, or risk sharing

• Climate financing: Governments, multilateral development banks, and international financial institutions might also help to de-risk climate transition activities through government schemes and partnerships (13). For example, green banks also seek to drive private investments into clean energy and other green projects

Beyond green financing, there is also a need for transition financing used to fund projects that are supporting the transition to a low-carbon economy, even if they do not have a direct climate benefit today. This often includes projects or initiatives in hard-to-abate industries, such as the cement or oil and gas industry, to develop new technologies to reduce emissions.

Apple: Apple has raised $4.7 billion via green bonds since 2016 (14). The funds have supported a variety of projects, including the construction of new solar and wind farms (approximately 1.2 gigawatts of capacity), the installation of energy-efficient lighting, and the development of new battery storage technologies. Apple's green bonds program supports the company’s ambitious climate and environmental strategy.

Enel : Since 2017, Enel has issued three green bonds, totaling $3.8 billion (15). The bonds were used to finance green projects, including the development of renewable generation plants, the construction and management of transmission and distribution networks, smart metering systems, the development of sustainable mobility projects, and demand response initiatives.

Bank of America : From 2013 to 2022, Bank of America issued ten sustainability-related corporate bonds totaling $13.85 billion (16). These issuances include bonds for green and social initiatives, like racial and gender equality and economic opportunities.

Climate impact

Targeted emissions sources

Green bonds do not directly address GHG emissions sources, but are rather a financing method for projects and activities that can address emissions. Therefore, they can be used to address emissions across Scope 1, 2, and 3. However, green bonds (or green financing more generally) also risk being associated with greenwashing if projects/activities do not effectively address emissions targets or other sustainability metrics.

Decarbonization impact

Several measures suggest that after issuing GSSS bonds, companies improve their environmental performance (17) by targeting decarbonization projects and activities. The volume of avoided emissions per dollar invested can vary widely across GSSS bonds, depending on factors such as project/activity type and geography (18). Additionally, when green financing framework guidelines are followed, these can contribute to decarbonization efforts in indirect ways (e.g., reporting and target-setting guidelines enhance effectiveness, transparency, and rigor of decarbonization strategies and actions across the industry value chain).

Business impact

Benefits

• Favorable financing: Issuing GSSS bonds usually accompanies higher ESG performance, which allows companies to receive more favorable financing terms from ESG-focused investors (19). This can improve overall corporate financing by increasing liquidity and average debt maturity (20)

• Longer-term (sustainability) strategy: Facilitating deep-seated future value creation opportunities by attracting investors who care about the long-term, because investments in green projects often take time to pay back (21)

• Tax incentives: Issuing GSSS bonds can create tax incentives, such as tax exemption or credits as a monetary incentive to tackle difficult projects (22)

• Internal incentives alignment: Target-linked debt issuance such as SLBs can help align incentives within an organization by cascading company-level goals to middle management and operations targets and KPIs

Impact beyond climate and business

Co-benefits

GSSS bonds can have a variety of co-benefits, depending on the nature of the project they help finance (e.g., improving employee morale, creating community jobs, improving public health).

Typical business profile

GSSS is a label that can be used, in the context of standard securities laws and regulations, to apply to any standard bond issuance. GSSS bonds can be issued by a variety of companies, including financial institutions, utilities, technology companies, manufacturers, transportation providers, and real estate owners/managers. The types of projects that GSSS bonds finance vary depending on the company issuing the bond and the type of bonds (e.g., green bonds can help finance renewable energy projects, energy efficiency projects, water conservation projects, transportation projects, and sustainable buildings).

Stakeholders involved

An array of internal stakeholders will need to be engaged to facilitate green financing, for example:

• Executive Management: Todetermine whether to pursue GSSS or green bond financing and manage investor relations

• Finance & Investor Relations: To manage GSSS bond issuances and ensure that proceeds are used in accordance with the applicable frameworks (e.g., Bloomberg MSCI, S&P Green Bond (23), CBI and ICMA frameworks) and to address ongoing reporting obligations

• Legal & Compliance: To draft the GSSS or green bond prospectuses and minimize legal risks by ensuring that bonds comply with applicable laws, regulations, and standards

• Sustainability team: To identify and qualify the green projects the bond proceeds may be used to finance

Key parameters to consider

Solution maturity

Green bonds have a proven track record of raising capital for green investments. However, there is some variability as to the decarbonizing impact of the projects these debt instruments help finance, due to the wide range of projects they have funded so far (24).

Technical constraints or pre-requisites

A company’s internal expertise and ability to effectively implement and execute decarbonizing projects is crucial. An otherwise strong balance sheet will also help generate investor interest.

Eventual subsidies used

Regional and country-specific subsidies apply based on location of use (e.g., renewable energy tax credits from the Inflation Reduction Act in the US)

Implementation and operations tips

1. Assess projects for funding potential: Identify qualifying projects or activities based on market guidelines or standards (e.g., certification under the EU Taxonomy or Climate Bonds Standard) (25)

2. Outline funding need: Identify how much capital is needed and over what timeframe, and generate internal approvals to issue green bonds

3. Issue the bond(s): Structure the asset with an investment advisor, informed by corporate investment need and type, and overall credit rating, depending on the strength of the company’s balance sheet. This will also entail determining the legal structure and ongoing reporting obligations

4. Deploy proceeds: Disburse funds to internal teams to implement projects and activities

5. Arrange independent review: Determine how projects or activities will be reviewed (and by whom) to provide investor confidence

6. Plan for tracking and reporting: Determine how the use of proceeds will be tracked and managed to ensure they finance eligible projects and activities, or how corporate sustainability is tracked and reported; engage an auditor for external review as needed (International Capital Markets Association recommends appointing external reviewer to confirm alignment with frameworks) (26)

7. Monitor and report: Publish information on impact and use of proceeds annually, at minimum

Footnotes:

(i) Note: Social bonds are part of GSSS and are used to finance social projects that achieve positive social outcomes.