How green bonds help tackle climate change

Last week, India, through the Hyderabad-based Greenko group’s $950 million green bond, made its biggest contribution to the global green bond market. According to new research, green bonds, which allow firms to raise finance for low carbon and climate-friendly projects, offer a promising solution to climate change while delivering better outcomes for companies.

In a new study published in the National Bureau of Economic Research, Caroline Flammer assesses the financial and environmental performance of 217 green bonds issued worldwide by public companies between 2007 to 2018 and listed in Bloomberg’s fixed income database. She finds that green bonds offer financial benefits to companies in the long run in terms of better returns on assets and equity. In addition, green bonds fulfil their intended goal of better environmental outcomes: companies issuing green bonds saw a significant reduction in their CO2 emissions and a boost in their environmental ratings.

Though green bonds are only a small share of the larger bond market, they have grown rapidly over the last decade. In 2008, only $1 billion worth of green bonds were issued but by 2018 this had increased to $143 billion. Flammer finds that most of these green bonds were issued by governments, financial and utility companies. The green bond market is dominated by three countries - China ($83 billion worth of green bonds issued over the last decade), United States ($58 billion) and France ($57 billion) have been the largest issuers of green bonds. While India still lags behind these countries ($5.2 billion in 2018), it is one of the fastest-growing green bond markets in Asia.

As it is a growing market, Flammer cautions that there are neither uniform standards to classify a green bond nor a governing body to regulate the market. She suggests that addressing this is critical for green bond markets to flourish.

Also read: Green Bonds: Effectiveness And Implications For Public Policy

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