Many people equate investment markets purely and simply with equity markets. But in fact, fixed interest markets are larger, with PIMCO estimating the size of global fixed interest markets to be around $106 trillion USD, compared to the $95 trillion in global stock markets³³.

And one of the fastest growing parts of the bond market is Green Bonds (and their close relatives Social Bonds and Sustainability Linked Bonds). World-wide issuance of Green and Social Bonds reached half a trillion dollars during 2021, a figure expected to grow to $1 trillion annually by 2023³⁴.

Unlike traditional fixed interest instruments, Green Bonds are issued to raise funds specifically for projects that have positive environmental impacts. The majority of Green Bonds issued are ‘Use of Proceeds’ Bonds, where proceeds are earmarked for specific projects³⁵. Best practice issuers of such bonds will be extremely transparent in the setting of targets, the allocation of proceeds, and the reporting of progress towards defined goals.

Social bonds work in a similar way but are used to fund projects with social, rather than environmental goals.

A newer alternative to Green Bonds is the Sustainability Linked bond. These bonds do not have their proceeds set aside for any specific project. Instead, they penalise the issuer by requiring higher interest payments to investors if the issuer fails to meet pre-defined sustainability targets, such as reducing carbon emissions. Some experts believe such bonds can be more powerful in funding the transition to a low carbon economy.

Green and social bonds in Australia

Although Green and Social Bonds first originated in Europe, Australia now has a buoyant and growing market for such instruments. Although largely issued by state governments, there is also a nascent corporate green bond market. Developer Lend Lease for example, raised $800m in just 5 months during 2021 through 2 oversubscribed Green Bonds³⁶. Proceeds were earmarked for a number of ‘green building’ projects, with benefits ranging from the lowering of carbon emissions, to reducing the environmental impact of materials and the delivery of health and wellbeing benefits. 

State governments are currently issuing bonds to fund everything from light rail projects and cycleways to solar farms and social housing. In terms of Federal Government issuance, the Australian Financial Review recently reported that issuances by the National Housing and Finance Corporation were regularly oversubscribed two to three times³⁷.