Considering Investing in Green Bonds? Get The Low Down..

The technological shift towards renewable energy is so large that it is comparable to the most significant shifts in history, for example; traditional phones to mobiles or the move from horse and carriage to cars. Green bonds are on track to be an important global disrupter in tackling climate change.

Renewable and sustainable technologies is an ongoing expensive development from electric vehicles to water treatment. The Green Bond market is the perfect place to fund this research.

The first AAA-rated Green Bond was launched in 2008 by The World Bank in response to demand from large scandinavian pension funds looking for ways to support climate-friendly projects. The World Bank has issued 9.7 billion US dollars to help support almost 70 key projects worldwide. Due to the active efforts of The World Bank the Green Bond market has grown from a niche asset class to nearly 200 billion US dollars, this amount is expected to double by the end of the year and if it continues to grow at it's current rate it will exceed 1.2 trillion US dollars by 2020.

The large demand coming from private investors is what is fueling the the large growth in the green market. To achieve the objects of the Paris Accord an estimated 12.1 trillion US dollars will be needed through the next 25 years - this is 75% larger than most consensus projects.

When considering Green Bonds to invest in - credit, quality, maturity, price and also an assessment of the project that the bond will support all need to be taken in to consideration. To assist with this process the International Capital Market Association (IMCA) developed the Green Bond Principles which are supported by over 115 institutions that participate in the Green Bond market. The IMCA's aim for these principles is to make Green Bond's appeal to institutional investors. The four core components are:

• Defined use of proceeds - in which the environmental benefits of every project that the bond will support are clearly specified
• Continuous project evaluation and selection - in which the bond's project evaluation and selection is complemented by regular independent reviews of each project's performance 
• Management of proceeds - in which funding allocations to every project are clearly identified, as are the underlying investment of any unallocated funds 
• Reporting - which lists all projects to which money has been allocated, including a product description, amount invested and expected environmental impact

With more and more Green Bonds emerging it is important to use the IMCA's principles when considering investing to ensure the bond in question is a pure Green Bond. S&P Global Ratings has responded to increasing investor demand by creating a Green Bond Evaluation Tool, which can be used alongside traditional bond analysis and evaluates the environmental impact of each project that is financed by a particular green bond. 

It is imperative that there is a focus on transparency and participation which will clearly set out the true environmental impact of Green Bond investments and ensure investor demand will continue to grow.