Debt for Climate: Green Bonds and Other Instruments

Abstract

This chapter, prepared for the Edward Elgar Research Handbook on Climate Finance and Investment Law (2020, Michael Mehling and Harro van Asselt (eds.)), examines the rise of green bonds, climate bonds, and other green financial instruments. Although climate finance has enjoyed positive momentum in recent years, this momentum is at risk—with the possibility of reversal—if climate markets fail to provide competitive risk-adjusted returns. For climate finance to compete effectively, governments, issuers, and investors must resolve a set of interrelated problems. First, green investments must compete with traditional “brown” investments, some of which enjoy significant subsidies. Even when not competing against subsidized industries and investments, green investments may still lack an advantageous risk-return profile and may suffer lower demand compared to standard investments. Second, green investments must create sufficient trust in their “greenness” so as to avoid accusations of greenwashing that would not only jeopardize a given issuer’s offerings, but would also erode trust in green markets generally. This chapter describes public and private efforts to develop a robust deal infrastructure for climate finance, including mechanisms like distributed ledgers and other financial technologies that are designed to make green investments more competitive with brown investments, while also increasing trust and reducing transaction costs.

Keywords: green bonds, climate finance, green loans, green equity, green loans, sovereign debt