Investing in Green Bonds – promoting sustainable projects

Green Bonds play an integral role in the financing of sustainable projects and thus in the battle against climate change.
We explain how this new type of investment works.

Challenges that society faces can often only be overcome at great expense.

The funds for that purpose are procured by countries and companies through classic financial market instruments: by borrowing funds, taking out loans – and issuing bonds.

A recent example:

Challenge:

Infrastructure for transport, telecommunications and energy is in need of renewal all over Europe

Project:

Expansion of public transport system

Issuer:

The investment bank of the EU member countries is the issuer of a bond. It procures capital for the project and finances it in that way

The EU project bonds:

Certificates that guarantee that the capital collected will be paid back with interest after a defined term. For the investors, bonds are a financial investment

A new challenge

Global temperatures have increased by 0.8°C since the pre-industrial era. The latest studies predict a rapid continuation of global warming - even if countermeasures are implemented:

Threshold at which global warming including its extreme consequences might get irreversibly out of control according to predictions.

Scientists are largely in agreement about the cause: greenhouse gases produced by human beings. Climate change caused by greenhouse gases will be a determining factor for the future of humanity. With consequences of which Deutsche Bank is also aware.

It is necessary to implement countermeasures quickly in order to avert the consequences of climate change wherever possible and react to changing environmental conditions.

Countermeasures

Financing

Particularly the developing countries, which are affected by climate change to a special degree, are hardly able to shoulder the financing for such countermeasures.

Issuer

This is where the issuers of Green Bonds come into play. They procure money for financing sustainable projects and guarantee repayment of the money with the bond.

These are mainly:

The World Bank, for example

In 2008, 600 million USD from Green Bonds were used to expand the power grid in India, so regions lacking in infrastructure can be supplied with green power from hydroelectric generating plants.

Germany, for example

In 2014, the state-owned development bank KfW (Kreditanstalt für Wiederaufbau) placed its first Green Bond with a volume of 1.5 billion EUR with the assistance of Deutsche Bank. Its goal is to promote renewable energies.

Unilever, for example

In March 2014, the consumer goods manufacturer issued Green Bonds with a volume of 411 million USD in order to reduce water consumption, waste volume and greenhouse gas emissions. Deutsche Bank supported the company in that endeavour.

Green Bonds

Bonds are certified by an official document that sets out the conditions and goals of the finan­cial trans­action. Green Bonds have to fulfil specific requirements with regard to transparency and reporting. This gives investors the guarantee that their investment meets the sustainable criteria they desire.

First rules

drafted by the international non-­profit organisation Climate Bond Initiative. They ensure that the invest­ments fulfil their desig­nated purpose – together with share­holders, climate experts, banks, rating agencies and academics.

The Green Bond Principles

were established by banks, issuers, investors and environ­mental organisations: They are guide­lines for utili­sation and admin­istration of the proceeds of Green Bonds as well as for the relevant reporting.

Green Bond Principles Observers from the area green finance, including NGOs and universities Additional information via mouseover Founders of the Principles, including Deutsche Bank Signatories of the Principles: issuers, investors and banks

The rules are still voluntary. On the one hand, the market for Green Bonds, which is growing rapidly, requires clear rules in order to ensure that the capital which is procured also fulfils the pre-defined purpose; on the other, it is not supposed to be over-regulated. As volumes continue to grow, it will be necessary to establish new mechanisms that guarantee transparency and thus reliability for market participants. A process in which Deutsche Bank is actively participating.

Investors, their capital and its repayment

Investors, meaning the money lenders for Green Bonds, are seeking socially responsible and ecologically sustainable investments. They are mainly:

  • institu­tional inves­tors such as pension funds
  • insurance companies
  • churches

“Increasingly more investors and corporate clients regard “green” bonds as a seal of quality to some extent. Such security papers confirm that the issuer is making an effort to ensure sustainability.”


Jamie Stuart,
Head of UK Debt Organisation at Deutsche Bank, responsible for procure­ment of borrowed capital

Until just a few years ago, Green Bonds were a niche product and development banks were building up the market for them.

Volume of newly issued Green Bonds per year in billion USD

by development banks
by companies
other issuers

Those 503 billion USD are being used to finance projects in the following categories: