In the wake of the Covid-19 pandemic, governments and businesses will focus their attention on rebuilding, including a move to more environmentally sustainable economies. As a result, issuers of all types are using green bonds to finance projects related to environmental initiatives.
On a steady upward trajectory over the past few years, green bonds are a growing category of fixed-income securities that raise capital for projects with environmental benefits, such as renewable energy or low-carbon transport. Although they make up only a small fraction of the total global bond market—about 4 percent—green bonds reached a record high of nearly US$270 billion by the end of 2020. New issuance could reach US$400-$450 billion this year, according to a report by the London-based non-profit Climate Bonds Initiative, which promotes investment in the low-carbon economy. Due to strong demand relative to the wider bond market, green bonds have shown comparatively strong resilience during pandemic-related market volatility.
“The green bond market is growing very quickly,” says Angus Young, senior lecturer and research fellow at Hong Kong Baptist University’s Department of Accountancy and Law, and Centre for Corporate Governance and Financial Policy. He adds that by not including green bonds in a fixed-income portfolio allocation, investors could be missing an opportunity for asset diversification.
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