Green bonds are defined and qualified by a clear “use of proceeds” (UoP) pledge by the borrower to allocate the funds borrowed into projects to meet specific environmental objectives, including climate change mitigation and adaptation.1 This makes it easier for investors to identify and provide funding to companies based on their future intentions, rather than on their historical record on sustainability..
Fixed income generally — and green bonds specifically — play a vital and immediate role in funding the transition to a low carbon future. For example, financing energy companies (possibly the worst polluters) that have made clear commitments to transition out of fossil fuels can be potentially very impactful. Not only do green bonds create important incentives, which can contribute to changing behaviours and business practices over time, they also provide the necessary funding for companies to do so.
Governments and companies are paying ever greater attention to the current trajectory of carbon emissions and are allocating capital into projects that deliver environmental benefits. With a growing numbers of investors seeking to finance the right companies, green bonds should enjoy strong support through increased portfolio allocations in the future.
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