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:
Infrastructure for transport, telecommunications and energy is in need of renewal all over Europe
Expansion of public transport system
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
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
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.
If temperatures increase by over 4°C, it is probable that the sea level will increase by 0.5 to 1m by the year 2100.
Global warming is changing our ecological system and contributing towards the destruction of the natural habitat of many plants, animals and micro-organisms.
Weather extremes such as hurricanes, floods or heat waves are occurring more frequently as a result of higher temperatures.
83 percent of the 500 largest companies in the world agree that climate change constitutes a corporate risk for them.
Crop failures caused by persistent drought or flooding are forcing many people to flee from their homelands.
In many places, global warming is transforming land used for agriculture into deserts, and by doing so it aggravates hunger, illness and poverty in those regions.
It is necessary to implement countermeasures quickly in order to avert the consequences of climate change wherever possible and react to changing environmental conditions.
Today more money per day is already being invested in the generation of renewable energies than in fossil-fuelled and nuclear power plants combined. This trend has to continue.
Improved transport efficiency through alternative fuels and mass transport. A Green Bond in which Deutsche Bank has also invested is already supporting public transport in London.
Increasingly more investors are banking on sustainable real estate where environmental factors are also taken into account in the planning and construction processes.
In many places, dams are being constructed to protect against flooding and high water in order to counteract the rising sea levels caused by global warming.
Resilient agricultural systems have to be established in order to prevent the desiccation of arable land areas and counteract crop failures, hunger and existential threats.
Every year over one billion tons of carbon dioxide are released into the atmosphere because of the destruction of tropical forests alone. That is a substantial part of the global quantity of carbon dioxide that human beings release through their activities every year.
Particularly the developing countries, which are affected by climate change to a special degree, are hardly able to shoulder the financing for such countermeasures.
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:
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.
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.
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.
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.
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.
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.
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, meaning the money lenders for Green Bonds, are seeking socially responsible and ecologically sustainable investments. They are mainly:
“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.”
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
Those 503 billion USD are being used to finance projects in the following categories: