It’s an asset class that might seem a bit marginal and more than a little mysterious. But since the first AAA-rated ‘green bond’ was launched by the World Bank in 2007, the market has grown enormously. Recent figures point to a sizeable total value of over $500bn. We take a closer look to find out what defines a green bond and why such huge sums are being raised.

Green bonds gained their nickname because they are used to finance a specified sustainable project. For this reason they can be known as ‘climate’ bonds, as the project should have a positive environmental impact. They are issued by large corporations, such as Apple and SNCF, and even governments, such as Indonesia and France. As with any other bond, they are backed by the issuer’s whole balance sheet. In this way they are no riskier than any other bonds from the same issuer.

So why issue green bonds at all? The costs to the issuer might be slightly higher. They need to demonstrate that the finance is being used for this project alone. But that aside, issuers have found strong demand for the bonds, as the growing ESG and SRI sectors seek out suitable investment assets. So much so that issuers with low sustainability credentials have tried to jump on the green bandwagon. It’s known as ‘greenwashing’. An attempt by issuing entities to appear greener than they really are.

How then to regulate the use of the term? In order to sidestep greenwashing and avoid confusion, the EU has launched their ‘taxonomy’- a set of rules and definitions. Borrowers can use it to gauge whether their project qualifies as sustainable. And investors can feel confident that a bond truly deserves to be called ‘green’.

The EU’s initiatives tie in with global intentions to ‘build back better’ after the damage inflicted by the Covid-19 pandemic. And could help to ensure that the many billions of dollars required will be directed to the most sustainable projects.