Finder makes money from featured partners, but editorial opinions are our own.

What are green bonds and how can they help fight climate change?

Green bonds are a great way to align your money with your values. Here's how you can invest in green bonds.

Green bonds are rapidly growing as investors look to help the transition to net zero.

But it goes beyond simply doing the right thing – the sector remains attractive from a risk-reward perspective, too.

Like any traditional bond, they behave as a loan between the issuer – which can be governments or corporations – and investors. In the case of green bonds, this loan is used to fund green projects ranging from renewable energies to transportation, agriculture production and sustainable source uses.

Again, like traditional bonds, you'll agree to give a certain amount of money to the issuer of the bond for a set timeframe in exchange for periodic investment payments.

What are green bonds?

A green bond is a type of fixed-income that has been issued to raise money for climate or environmental projects.

These bonds can be provided by either a government or private corporations.

The green bond market is still in its infancy but is rapidly growing.

The history of green bonds dates back to 2007. Fast forward to 2022 and according to the Responsible Investing Association of Australia (RIAA), "impact investing" locally is worth $30 billion. They say that $24.6 billion is channelled into "green, climate or social impact" bonds.

Why invest in green bonds?

Green bonds offer an attractive alternative to regular bonds, with most investing for 3 main reasons:

1. Align your values with your money

Much like all environmental, social and governance (ESG) investing, the sector is built on the back of investors wanting more than just returns from their capital.

2. Diversify from traditional bonds

Just like all sectors in investing, diversification is important.

Green bonds allow you to diversify into different forms of government or corporate debt, reducing your risk.

3. Tax benefits

In some cases, pending tax laws where the bond is issued, green bonds have the added perk of giving you a tax incentive.

This is because governments are actively trying to reduce their emissions, with debt instruments like green bonds helping this transition towards cleaner energy.

Size of the market and opportunity

The green bond market has been a relatively slow starter for the first decade following its inception in 2007. But, over the last 5 years it has been quick to make up for lost time.

The World Economic Forum is now predicting that by 2023, there will be over US$1 trillion invested in green bonds.

Unfortunately, that is not nearly enough to combat climate change. According to research by McKinsey, net-zero will cost around US$275 trillion by 2050 or require an investment of US$9.2 trillion per year on average, an annual increase of US$3.5 trillion. While not every dollar will be issued in bonds, the sheer size still remains huge.

And while this makes it a sizeable investment opportunity, as McKinsey states, this additional investment is about half of global corporate profits, one-quarter of total tax reviews or around 7% of total household spending.

Do green bonds fight climate change?

Green bonds can play a critical role in fighting climate change as they help to fund the transition to net-zero or a low carbon environment.

Green bonds after all are used to fund projects that will directly impact the climate.

These include:

  • Renewable energy projects, such as solar and wind farms
  • Clean rail transportation
  • Low carbon buildings
  • Energy efficiency upgrades
  • Environmentally sustainable housing
  • Electric vehicles

As you can see, all of these projects are directly funding issues we need to solve if we are to fight climate change, meaning investing in green bonds will help.

How to get involved

There are 3 ways you can buy green bonds as a retail investor:

  • Exchange-traded funds (ETFs) that own green bonds
  • Superannuation funds
  • Buying through a wholesaler

Buying green bonds directly is a little challenging.

Bonds are traditionally targeted at financial institutions and superannuation funds due to the pool of resources they have.

As such, in most cases you'll need to buy a green bond through an intermediary such as financial institutions, an ETF or through your superannuation.

Outlook for green bonds

The good news for those in the green bond space is that the sector is continuing to gain investor interest.

Governments and corporations alike are looking for ways to reduce their carbon footprint. And lots of these expenses require the issuing of debt.

As such, the green bond market is tipped to continue its growth.

Pros and cons of green bonds

Pros

  • Environmentally friendly
  • Incredibly large and growing market
  • Direct access to helping fight climate change
  • Allows you to diversify your assets through green bonds

Cons

  • Can be hard to access
  • All bond return rates, including green bonds, are lower than other financial assets
  • Not easy to identify impact
  • Lack of liquidity in the market

Other sustainable bonds

Like everything in finance, the market has evolved from the simple green bond.

Investors now have the choice of:

Blue bonds – Blue bonds are a subsection of green bonds that are specifically aimed at ocean conservation. These include managing waste, promoting marine biodiversity and ecologically friendly developments. But blue bonds are still rare – there are only 6 blue bonds issued by late 2021.

Transition bonds – As the name suggests, these bonds are to help businesses transition towards a more renewable future. Aiming at traditional brown and olive industries (think mining, commodities, etc.), these bonds help move these industries towards a greener future. And while ESG investors might not love helping miners, it can have a big impact on climate action.

Sustainability linked bonds – Sustainability linked bonds (SLBs) differ as they have no restrictions on how the money is spent. Instead, it is based on the business itself. Should a company meet sustainable targets in any environmental, social or governance metrics, they are eligible for funding.

Social bonds – These tackle a very different but equally as important part of ESG, being social. As such, these bonds are used to finance goods and services that have a positive outcome in society, for example, education, housing and improving food security.

Green bonds vs sustainability linked bonds

The main difference between the two bond types is that one is more restrictive than the other.

A green bond will help the transition to net-zero and fund a number of other environmental processes, but it can't go beyond this mandate.

On the other hand a sustainability linked bond (SLB) is aimed at all of the UN's 17 sustainable development goals. These range from clean water for all right through to environmental goals. As such, an SLB is a broader range bond that can help fix more issues in the world then green bonds.

However, the two don't work exclusively of each other. Sustainability linked bonds are meant to complement green bonds and should enable more issuers to gain access to financial markets for differing projects that traditional green ESG investors would want to be financed.

Bottom line

As the trend towards ESG continues, there is little doubt that green bonds are growing and will continue to do so.

They are still an emerging asset class, placing limitations in terms of liquidity and options for investors.

But for those who are looking to do the right thing and want to grow their money in a sustainable fashion, a green bond can serve this purpose.

1 - 7 of 36
Name Product Price per trade Inactivity fee Asset class International
eToro
Finder AwardExclusive
eToro
$0
US$10 per month if there’s been no log-in for 12 months
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get 12 months of investment tracking app Delta PRO for free when you fund your eToro account (T&Cs apply).
CFD service. Capital at risk.
Join the world's biggest social trading network when you trade stocks, commodities and currencies from the one account.
Moomoo Share Trading
US$0.99
$0
ASX shares, Global shares, US shares, ETFs
Yes
Finder exclusive: Get an additional 30 days on top of the regular brokerage-free period for new accounts. T&Cs apply.
Trade shares on the ASX, the US markets and buy ETFs with Moomoo. Plus join a community over 20 million investors.
Spaceship US Investing
US$0
$0
US shares, ETFs
Yes
Dive into US markets with $0 brokerage, starting with just a $10 investment.
Unlock US stocks and ETFs with minimal entry barriers, offering straightforward, low-cost options for new and seasoned investors.
Tiger Brokers
US$2
$0
ASX shares, Global shares, US shares, ETFs
Yes
Trade Australian, US and Asian stocks with no minimum deposit on Tiger Broker’s feature-packed platform.
CMC Invest
Finder Award
CMC Invest
$0
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
$0 brokerage on US, UK, Canadian and Japanese markets (FX spreads apply).
Trade over 45,000 shares and ETFs from Australia and 15 major global markets. Plus, buy Aussie shares or ETFs for $0 brokerage up to $1,000 (First buy order of each security, each day - excludes margin loan settled trades).
Webull
US$0.25
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
Sign up & deposit $200 to get $100 of rewards value, or deposit $1,000 to get $200 worth. Up to $5,450 value available. T&Cs apply.
Trade ASX and US stocks and US options, plus gain access to inbuilt news platforms and educational resources. You can also start trading for less with fractional shares.
Saxo Invested
US$1
$0
ASX shares, Global shares, Options trading, US shares, ETFs
Yes
Access 22,000+ stocks on 50+ exchanges worldwide
Low fees for Australian and global share trading, no inactivity fees, low currency conversion fee and optimised for mobile.
loading

Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

More guides on Finder

Ask a Question

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our 1. Terms Of Service and 6. Finder Group Privacy & Cookies Policy.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Go to site