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Meghna Mehta

Meghna Mehta

Vice President, MSCI Research

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Green bonds: Growing bigger and broader

Green bonds: Growing bigger and broader

  • The variety of purposes funded by green bonds has expanded beyond alternative energy to green building and sustainable-transport projects.
  • Green-bond initiatives include transition bonds, target-linked bonds and innovative structures designed to enhance bond liquidity.
  • The amount raised by ESG-linked loans — those that are tied to the issuer’s ESG performance — more than doubled in FY 2019 from the prior year.

As the green-bond market matures, it is developing offshoots. In the last five years,1 we have seen shifts in the types of projects financed, as well as the emergence of innovative types of bonds and loans linked to environmental, social and governance (ESG) targets. Together, these initiatives may broaden the market, offering more opportunities to investors in search of green investment options and helping fund the transition to a more sustainable economy.


From alternative energy to efficiency and green building

When the Bloomberg Barclays MSCI Global Green Bond Index was launched in 2015, the largest category of projects funded by far were in alternative energy. Over the past five years, funding increased for an array of other purposes such as green building and sustainable transport projects. This may reflect an increasing diversity of issuers, as the market has expanded beyond supranationals, banks and utilities to include other types of corporate and public-sector issuers.


Green-bond funding has increased for a variety of purposes (USD bn)

This chart reflects estimated proceeds (in billion USD) raised by bonds eligible for inclusion in the Bloomberg Barclays MSCI Global Green Bond Index, as of Dec. 31 of the corresponding year. Included are energy-efficiency investments not otherwise classified under sustainable transport or green building — e.g., energy efficiency for noncertified buildings, public infrastructure, industrial processes, electrical grids and district heating. Sources: MSCI ESG Research LLC, Bloomberg Barclays MSCI Global Green Bond Index

Of these categories, sustainable transportation saw the highest rate of growth. We estimate that funding allocated to investments in public transportation, rail and electric vehicles by index-eligible bonds totaled USD 28 billion in 2019, to reach a cumulative USD 63 billion since the inception of the market. Funding to electric vehicles, related charging infrastructure and R&D saw growth driven by bonds issued by utilities and real estate investment trusts looking to enhance the green credentials of their properties.


Green-bond innovations

Meanwhile, we saw increasing innovation in this market. In 2019, we began to see funding directed outside the traditional buckets of alternative energy, energy and water efficiency, pollution prevention or green buildings to support “transition” projects, as well as bonds linked to specific targets or that aim to boost market liquidity.

  1. Transition bonds. These bonds fund a movement away from environmentally damaging  projects (such as coal-based power generation) toward greener projects (such as natural-gas-based power generation), although not toward best-in-class green projects (like solar photovoltaic power generation). For example, the European Bank for Reconstruction and Development in 2019 issued a green transition bond whose proceeds are used to help conversions from coal to gas and in the manufacture of recyclable plastic.2 Similarly, Marfrig Global Foods, a beef processor, issued a “sustainable transition bond” through which it would purchase cattle from farms that respect its deforestation criteria.3
  2. Target-linked bonds. By linking their coupon to the successful achievement of an environmental or social target, these bonds help finance specific green objectives. For example, Italian utility Enel SpA issued a bond linked to the United Nations Sustainable Development Goals that ties its yield to achievement of targets, such as the percentage of renewable energy installed.If Enel achieves its defined target by a set date, the coupon remains unchanged, and if not, the coupon is stepped up. Similarly, Conservation Capital arranged a “rhino bond” in which investors would be repaid their investment plus a coupon only if the population of black rhinos, an endangered species, increases through funding from the bond.5
  3. Bond structures that increase liquidity. Denmark’s central bank has been exploring the possibility of splitting a conventional green bond into two parts: a conventional green bond plus a green certificate that could be traded separately.6 The purported advantage is that the underlying sovereign bond would be more liquid, while a tradeable “green certificate” would ensure that green expenditures at least match the proceeds from the package. This model is designed to help sovereign states with limited funding to maintain liquidity by not fragmenting their issuance.


Beyond green bonds: ESG-linked loans

In 2019, substantial growth occurred in ESG-linked loans, or those in which companies and their bankers tied terms to ESG performance. These ESG-linked loans totaled approximately USD 100 billion in FY 2019, more than double the volume raised in FY 2018.7 Examples include the Schuldschein market in Austria, where the margin paid by cellulose-fiber maker Lenzing Group steps up or down by 2.5 basis points (bps) if its ESG rating changesand utility company Iberdrola, which signed a five-year syndicated credit facility that linked the spread over IBOR to its targeted greenhouse-gas emissions.9

ESG-linked loans are fundamentally different from green bonds and serve different needs in the market.

 Green / Social / Sustainability BondsESG-linked Loans
PurposeInvest in specific green, social or sustainability projects or project categoriesCreate a time-bound financial link (via the interest rate) between a borrower’s ESG target and its achievement
Use of proceedsRing-fenced to green, social or sustainability projectsGeneral-purpose use
Interest rateIndependent of projects invested in through the bondInterest-rate changes based on success or failure in achieving ESG-linked target
Borrower industryPrimarily financial institutions, utilities, real estate and governmentsVarious industries
Benefits to issuer/borrowerInvestor diversification, “green” reputationPotential for lower interest rate if target is achieved
Benefits to investor/lenderIncrease “green” or “social” portfolioPotential for higher interest rate if borrower does not meet target
Size of market~USD 250 billion in 2019~USD 100 billion in 2019


Like green bonds, ESG-linked loans have been growing over the past few years. Several entities have both issued green bonds and taken out ESG-linked loans,10 mostly in the energy and utilities sectors, given the pressure that these sectors face to move toward a lower-carbon world.

The coronavirus pandemic and its economic impacts may be occupying a great deal of investor attention at the moment, but climate change and sustainability remain high on many investors’ – and companies’ – agendas. Green bonds and their offshoots could potentially offer new opportunities to help make the pandemic recovery greener as well.



1Green bonds are fixed-income securities whose proceeds are exclusively and formally applied to projects or activities that promote climate or other environmental-sustainability purposes. The market value of Bloomberg Barclays MSCI Global Green Bond Index constituents — a proxy for this market — grew from USD 60 billion in December 2015 to USD 372 billion in December 2019.

2“Green Transition Bond Information Template.” European Bank for Reconstruction and Development, September 2019

3“Marfrig Sustainable Transition Bond Framework Overview.” Marfrig, July 2019.

4 “Enel successfully places its first ’General purpose SDG linked bond’ on the European market with a multi-tranche issue of 2.5 billion euros.” Enel, Oct. 16, 2019 .

5“Innovative Finance.” Conservation Capital

6“Green Issuance.” Danmarks Nationalbank, Dec. 5, 2019.

7MSCI ESG Research; Poh, J. “ESG Debt: A User’s Guide to Ever-Growing Menu of Bonds And Loans.” Bloomberg, Oct 16, 2019

8“Lenzing Investor Presentation.” Lenzing Group, Nov. 6, 2019

9"Iberdrola extends two multicurrency syndicated loans for €5.3 billion with the best conditions since 2007.” Iberdrola, Jan. 29, 2018.

10MSCI ESG Research; ”The green and sustainability loan market: ready for take-off." Environmental Finance, July 20, 2018



Further Reading

Have corporate green bonds offered lower yields?

ESG and the cost of capital

2020 ESG trends to watch

Bloomberg Barclays MSCI ESG Fixed Income Indexes