Going Green: Why to Raise Capital with Green Bonds?
In short:
- Green bonds as financial instruments are gaining its popularity among corporations as well as small start-ups in order to raise the capital.
- Besides tackling the environmental issues, green bonds can bring benefits to strategic and financial performance of the issuing companies.
- The performance of green bonds as financial instruments is not fully exploited yet, however they are definitely effective in fighting the global climate change.
According to the Climate Bond Initiative, approximately $195 billion of green bonds and loans were issued in 2020, accounting for a 9% increase since 2019 and this trend continues to grow exponentially. What is behind this popularity to go green among companies? This article will look into the benefits of acquiring a relatively new financial instrument - green bonds.
In essence, green bonds are income-fixed instruments, designed to raise the capital for the projects with environmental benefits, such as alternative sources of energy, clean water, efficient use of natural resources etc. They first appeared in 2007 as AAA-rated bonds with the support of the European Investment Bank and World Bank. First issued by institutional investors, they have immediately gained popularity among corporations, so the latter ones entered the green bond markets in about 5 years since their inception. Nowadays, both small start-ups as well as market leaders of different industries are using them not only for the purpose of the capital raise, but also as a tool of their Corporate Social Responsibility strategy (CSR). Here is the graph of the green bonds issued by countries. As you can see, this type of funding is already occupying a prominent place worldwide due to the importance of climate change on the global agenda, including emerging and developing countries.
With the great public interest, corporations started widely undertaking green bonds in their practices. There is no wonder why: besides environmentally-protective benefits, the issuance of green bonds can bring many tangible and intangible advantages for a company. Some of them are as follows:
- Value-enhancement. The evidence suggests that the issuer enjoys significantly higher returns at the announcement, indicating investors’ positive expectations of the green bonds contribution to the shareholder value. Moreover, companies that went green are documented to obtain an average of 2.4% increase in the long-term company value.
- Lower cost of capital. Doing business in an environmentally-protective manner is rewarding, but costly. Therefore, green bonds are suitable for raising capital in the large-scale investment projects, such as solar panels, windmills etc., since they cannot be always afforded immediately, but long-term revenues and social effects from undertaking them are very attractive.
- Safety. Green securities are viewed to be safe financial instruments with low-riskiness, as they can accurately predict companies’ cash flows due to their fixed rate of return.
- Price. Generally, sustainable bonds are similar in pricing to their regular counterparts. However, the recent evidence suggests that green bonds pricing is way advantageous and generous due to their “greenium effect” - a premium for being a green financial instrument.
- Diversified and increased investor base. Green companies are attractive for sustainable investors that can greatly diversify their shareholders’ variety enhancing their striving for environmental, social and governance (ESG) practices in operations. Additionally, as a positive feedback-loop effect, diversification will induce further awareness about the company and thus boost their investment demand. In result, new types of investors will potentially provide the market with future issuances.
Overall, green bonds are relatively new and not fully exploited financial instruments yet. However, they serve a noble purpose - a tackle of global climate change. Thus, their importance cannot be underestimated as environmental problems and their consequences should be approached immediately and collectively. Alongside, undertaking green bonds can become a really effective tool for companies, that can improve financial and environmental performance as well as attract long-term sustainable investors.
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