A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations¹. Green bonds typically come with tax incentives to enhance their attractiveness to investors¹.

Green bonds are particularly well suited to finance the energy transition from fossil fuels to renewables. Iberdrola, the Spanish global energy company, is the world’s leading business group in the issuing of green bonds, having issued over 13 billion euros through capital markets in a total of 18 operations since April 2014². At the start of 2021 it issued the biggest hybrid green bond in history, worth €2 billion.

The International Capital Market Association (ICMA) has established Green Bond Principles with the following core ideas:

• The funds will be used for green projects that will have a beneficial effect on the environment 
• The issuer of a green bond must transparently notify the investors of the environmental sustainability goals, allowing for them to be assessed and externally reviewed
• The funds management will be appropriately and transparently controlled by the issuer, which will allow an auditor to perform a complementary review
• The issuer of this type of bonds will periodically update the information about how the funds are used and the environmental benefits obtained

As well as following the ICMA Green Bond Principles, Iberdrola follows the principles of the European Union taxonomy to drive private investment in sustainable growth and to contribute economically to a neutral climate economy, and standard for issuing green bonds in the EU. Between 75-81% of Iberdrola's 2020-2025 investment plan – with an allocation of 75 billion euros until 2025 and an estimated 150 billion euros to 2030 — is aligned with the European Union taxonomy for mitigating climate change.

The demand for green bonds has been growing faster than the supply. The hybrid green bond issued by Iberdrola in February 2021 was 4.5 times oversubscribed. The funds obtained will go to financing the offshore wind farms Saint-Brieuc in France, and Baltic Eagle, in Germany. 

With ambitious de-carbonisation plans being announced by the UK, EU, US and China, it should be expected that the supply of green bonds will increase to match the growing demand. Green bonds will then be the fuel of the energy transition.

References:

1. Investopedia « Green Bonds »
2. Iberdrola « Green Bonds »