Greenhouse gas emissions have risen sharply in recent decades and continue to increase globally. The Paris Agreement states that global temperature growth should be limited to below two degrees Celsius, preferably to one and a half degrees Celsius, compared to pre-industrial levels. To achieve these levels, the financial industry plays a crucial role.
“Sustainable finance” refers to the process of incorporating environmental, social and governance (ESG) considerations into investment decisions in the financial sector. To facilitate ESG investments, the implementation of new sustainable investment rules has been increased, introduced through amendments to existing legislation and through entirely new rules and guidelines. Most of the regulations have already entered into force. Despite the recent development and strengthening of regulation within sustainable finance, there is no regulation of green bonds in Sweden yet.
The Swedish green bond market emerged as a result of demand from Swedish institutional investors, who entered into a dialogue with the Swedish bank, resulting in the World Bank issuing the first green bonds for institutional investors in 2008. The international green bond market has grown dramatically in recent years, but still represents a small part of the overall bond market. Sweden is far ahead in the development of green bonds, and in 2019, green bonds accounted for 20% of the country’s total bonds. This is a very large share compared to other currencies such as the euro, pound sterling, yuan, Australian dollar, Norwegian krone, and US dollar, for which green bonds accounted for between 0.8 and 5% of bonds issued. However, this form of financing is becoming increasingly common around the world, and its use is expected to grow. “Green bonds allow raising capital and investing in new and existing projects with environmental benefits. Green bonds are an important part of sustainable finance and thus play a crucial role in the fight against the climate crisis.
What is a green bond?
Market participants should be aware that there is currently no clear definition of what a green bond is. However, the general perception is that green bonds are any type of bond instrument whose proceeds or equivalent amount will be used exclusively to finance or refinance, in part or in full, new and/or existing eligible green projects.
It should be noted that green bonds can be distinguished from climate bonds, which focus on projects that address climate issues, such as renewable energy or climate-smart infrastructure. The concept of green bonds is broader; bonds can also finance environmental projects that are not directly related to climate. Thus, climate bonds are a kind of green bonds. The concept of “climate bonds” is more common internationally, while in Sweden the term “green bonds” is more commonly used, even for purely climate bonds.