What Is a Green Bond?

By Thomas Kenny
Updated on October 21, 2022
A man and woman meeting in a forest to clean up the area
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Definition

A green bond is a type of fixed-income security an issuer uses to fund projects that promote sustainability.

Key Takeaways

  • Green bonds provide a way to help environmental causes through investing.
  • They allow investors to earn a return and fund projects that foster sustainability.
  • The World Bank issued its first green bond in 2008.
  • Buying a green bond might be too costly for retail investors. Still, there are green bond funds that make it easy to invest in baskets of green bonds.

How Do Green Bonds Work?

A green bond is a fixed-income security with proceeds that the issuer uses to fund projects that promote sustainability. Interest in these new types of bonds is rising because people can help influence change through investing.

Green bonds work like the typical bond. An issuer sells the bond, then pays the buyer interest on the bond. In the meantime, the issuer uses the money to fund projects. In the case of green bonds, a company, government, or organization uses the money raised from bonds to fund projects that help the environment.

The bonds are meant to reduce climate impact by using some or all of the money raised on a variety of green projects, including:

  • Energy efficiency upgrades
  • Clean energy tech projects
  • Mass transit improvement
  • Building wind farms
  • Decrease carbon output
  • Environmentally sustainable housing

Generally speaking, green bond performance tracks with bigger bond indexes like the Bloomberg Global Aggregate Index.

Note

Green bonds have caught on worldwide. From January to March 2021, the world raised $107 billion using green bonds. That number dropped to $83.8 billion in the first quarter of 2022.

Examples of Green Bonds

Here are a couple examples of green bonds offered by reputable organizations and government entities:

The World Bank's Green Bond Program

The World Bank was the first to use a green bond for funding, which started the practice in 2008. In 2019, it raised over $13 billion in funding for bonds related to climate change. By 2021, the World Bank's program had given more than $16 billion to multiple programs, including renewable energy, transportation, forest restoration, and reforestation, and providing 8.5 million people with improved water sources.

Note

U.S. cities have been issuing bonds for the specific purpose of funding environmental projects for several years. However, they don't always make it easy to identify their debt as green.

Massachusetts Clean Water Trust

The state of Massachusetts issued the first green security in the U.S. In April 2021, it sold around $351 million worth of green and sustainability bonds. The state discloses the projects that have been funded with the bonds, providing socially conscious investors with the means to track how the money is being put to work.

Since 2015, the Commonwealth of Massachusetts Clean Water Trust has raised hundreds of millions to fund wastewater and drinking water infrastructure projects through the state's green bonds.

Advantages of Green Bonds

Green bonds provide you with a way to earn income that is exempt from taxes. You'll also know that there's a good chance the money you lend to a corporation is being used in a way that is not harmful. Companies that use green bonds for funding also benefit. The green angle attracts a growing number of people who are more aware of and want to act to help fight climate change.

Higher demand for green bonds equals lower costs to borrow money. Lower costs mean reduced spending for a business. These savings are either passed down to you in the form of a dividend or used to lower the costs for funds.

Note

The practice of using green bonds to raise funds for non-green purposes is called "greenwashing." Be cautious when you're looking into bonds and funds to make sure the intent of the bond is genuine.

How To Buy Green Bonds

One of the easiest ways to invest in green bonds is to buy shares of a socially responsible fund. There aren't many bond funds in the environmental, social, and governance (ESG) market, as stock funds make up the bulk of this segment. Some of the fund choices are:

  • TIAA-Core Impact Bond Fund (TSBIX)
  • Domini Social Bond Fund (DSBFX)
  • Praxis Impact Bond Fund (MIIAX)
  • Pax World High Yield Bond Fund (PAXHX)
  • iShares Global Green Bond ETF (BGRN)
  • VanEck Vectors Green Bond ETF (GRNB)

Note

Purchasing a green bond on your own can be expensive. Bond funds tend to be more accessible, with some funds costing less than $10 per share, at times.

You can also buy individual green bonds through a broker, but the cost could be significantly higher than a share of a bond fund, for example.

Developments in Green Bond Funds

In 2019, HSBC Global Asset Management launched a green bond fund for emerging markets, sending more signals that green investments and investor concern for the environment should not be taken lightly.

In May 2021, Amazon issued a $1 billion green bond to use the funds to fund five sustainability areas: renewable energy, clean transportation, sustainable buildings, affordable housing, and economic advancement and empowerment.

China is aiming to be carbon-neutral by 2060. As the largest producer of greenhouse gases in the world, it will need a lot of green capital to reach its goals. Analysts expect a high amount of green debt to be issued from China in the next few decades.

Green bonds may not yield the highest returns, but not all profit is quantifiable. Green bonds give you the option to have a portfolio with income and a chance to invest responsibly.

Frequently Asked Questions (FAQs)

How do green bonds work?

Green bonds work like any other bond. An issuer sells the bonds and pays interest on them. Meanwhile, it uses the funding to start climate-friendly and/or sustainable projects.

What are the benefits of green bonds?

Green bonds allow investors interested in sustainability to earn interest while funding Earth-friendly projects and initiatives.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

  1. Berkeley Public Policy. "Green Bonds."

  2. Brown Advisory. "Income and Impact: Adding Green Bonds to Investment Portfolios."

  3. Cornell University Office of the Treasurer. "Green Bonds."

  4. Fidelity Capital Markets. "Green Bond Performance Primer," Page 4.

  5. S&P Global Market Intelligence. "Global Green Bond Issuance To Gather Steam After Record Q1, EU To Stay in Lead."

  6. S&P Global Market Intelligence. "Global Green Bond Issuance Slows Amid Rising Interest Rates, Inflation."

  7. The World Bank. "The World Bank Impact Report: Sustainable Development Bonds & Green Bonds," Pages 11, 42-43.

  8. Commonwealth of Massachusetts Office of the State Treasurer and Receiver General. "Massachusetts Clean Water Trust Announces Successful Sale of Green and Sustainability Bonds."

  9. Massachusetts Clean Water Trust. "Comprehensive Financial Report."

  10. Securities and Exchange Commission. "Statement on Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies."

  11. Praxis Mutual Funds. "Praxis Impact Bond Fund."

  12. Charles Schwab. "Individual Bonds."

  13. International Finance Corporation. "IFC, HSBC Create First Green Bond Fund Focused on 'Real Economy' Issuers in Emerging Markets."

  14. Amazon. "Amazon Announces Issuance of $1B Sustainability Bond."

  15. Center for Climate and Energy Solutions. "Global Emissions."

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