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Why is the green bond market becoming so successful?
Andy Fewings and Michelle Davies of Eversheds say this source of funding will continue to grow as the renewable sector matures and the emerging markets become less risky.
Briefly, what is the background to green bond insurance and how does it work?
Green bonds are bonds which are issued to raise finance for environmentally friendly projects, such as low carbon/energy efficiency projects, onshore wind and ground mounted solar projects. Since the first bonds were created in 2008 by the World Bank and Swedish Bank, SEB, they have gained momentum and are expected to grow at an increasing rate, which is why a consortium of leading banks (including Bank of America, JP Morgan and Citigroup) have recently issued guidelines to ensure integrity is maintained in the green bond market.
An institution issues the green bond to investors and has a maturity date and a coupon which reflects the return on investment for the subscribers to that bond. Funds raised are then invested in green projects—such as those referred to above.
Why is the market of green bonds so successful at the moment?
A combination of factors:
• bonds are a much cheaper way of raising capital
• renewable technologies are maturing to a degree that they are able to attract this type of funding
• renewable energy is recognised as a viable energy source which can provide energy security and reduce energy poverty via distributed energy solutions—this is important for bonds which are raising capital to assist in less developed markets eg Africa
Green bonds are given a rating by a ratings agency and are backed by entities such as the European Investment Bank, Zurich and EDF. They are issued in sufficient quantities to be easily tradeable and procure investment from portfolio investors—which means they have a much more diverse investment pool.
They are attractive to institutional investors,
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