Green bonds are based on how the funds are used. Issuers must direct 100% of their funds to financing projects that have a positive environmental impact, such as investments in renewable energy and public transport. In exchange, investors assume the issuer’s credit risk and earn returns comparable to traditional bonds.
Impact investing and change theory
Are green bonds considered impact investing? According to CFA Institute, “Impact investing is when an investment is made with the purpose of producing a positive, measurable social or environmental impact along with an economic return.” ” Intent is a key element of this definition. Portfolio managers must make this intention clear and provide environmental and social performance indicators.
– Some industry insiders say impact investing requires a “theory of change,” or a credible explanation of an investor’s role in creating an impact that is different from that created by the companies they invest in. . –
In the context of the bond market, it is clear that purchasing green bonds has broader implications than just having a positive environmental impact. Support the entire ecosystem.
By focusing on climate risk management, green bond issuers are demonstrating that they are in a less vulnerable position than their competitors in the future. Strong demand from investors shows that they are ready to finance this type of project. Collectively, market participants are helping accelerate the allocation of the trillions of dollars needed to finance the green economy.
According to AlphaFixe Capital, this synergy shows that green bonds, when combined with the intention of supporting a more sustainable economy, can meet the definition of impact investing and thus the theory of change.
How is the green bond market evolving?
The continued annual increase in the value of green bonds issued around the world is a testament to investor appetite for these types of bonds and the market’s appetite for financing credible environmental projects.
The green bond market is more mature than the social and sustainability bond markets. This is because they have been around longer and green projects are more economically attractive. On the other hand, sustainability bonds enable simultaneous financing of environmental and social projects, making them a good choice for issuers who want to manage a single impact bond program and fund all projects under a single label. This makes it an attractive option.
Another label that could see the light of day soon is Transition Bond. In 2023, the federal government released a classification roadmap report for transition funding. Since then, classification of eligible projects has been awaited. Such a classification would give issuers and investors the confidence to fund the decarbonization projects needed to reach net-zero emissions targets by 2050.
In the meantime, it is important to continue the dialogue with market players to direct capital towards a more sustainable and low-carbon economy.
Content provided by AlphaFixe Capital, Open Architecture Partner of National Bank Investments
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