# Understanding Green Bonds: Types, Benefits, and Buying Guide

![Green Bond](https://www.investopedia.com/thmb/wbacI5Yot31CJh-Ey7iekvAkytU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Green-Bond-final-07bf84e902a14fdf832b9c4bd5b272c4.png)

*— Investopedia / Lara Antal*

> **Definition**
>
> A green bond is a fixed-income debt instrument earmarked to raise money for climate and environmental projects. It’s asset-linked and backed by the issuing entity’s balance sheet, so it carries the same credit rating as its issuers’ other debt obligations.​

## What Is a Green Bond?

As global focus intensifies on tackling climate change and other environmental challenges, green bonds have emerged as a popular investment tool. They fund projects with positive environmental impact while offering investors returns. These bonds attract public, private, and multilateral issuers to raise capital for sustainable initiatives, ranging from renewable energy to pollution control.

These bonds are issued by public, private, or multilateral entities to raise capital for initiatives that contribute to a more sustainable economy and generate identifiable climate, environmental, or other benefits. Green bonds fund projects like renewable energy, energy efficiency, clean transport, conservation, and certified green buildings.

### Key Takeaways

*   Green bonds are fixed-income investments specifically used to fund environmentally beneficial projects.  
    
*   They often offer tax incentives that enhance their attractiveness to investors.  
    
*   Green bonds are part of the broader movement towards ESG (Environmental, Social, and Governance) investing.  
    
*   Various types of green bonds exist, each differing in terms of issuer, collateral, and project scope.  
    
*   Due diligence is crucial in verifying the environmental claims of green bond issuers to avoid greenwashing.

## Exploring the Benefits and Functionality of Green Bonds

Green bonds are meant to encourage sustainability and support climate-related or other environmental projects. They help finance projects ranging from energy efficiency to sustainable agriculture and forestry to protecting aquatic and terrestrial ecosystems. They also finance the cultivation of environmentally friendly technologies and climate change mitigation.

Like other bonds, the green variety often has tax incentives in the form of credits and exemptions, making them more attractive than comparable [taxable bonds](https://www.investopedia.com/terms/t/taxablebond.asp).

The Climate Bonds Standard Board and others often verify green bonds to ensure they fund beneficial environmental projects.

## The Evolution and Growth of the Green Bond Market

In 2012, green bonds issued totaled $2.6 billion. Recently, the market has grown because of government climate regulations and investor interest in ESG goals.

According to Bloomberg, green bond sales reached $575 billion in 2023, with governments issuing $190 billion.

Demand for green bonds may rise due to lower borrowing costs, anticipated interest rate drops, and improved market transparency from European regulations.

In the 2010s, green bond funds emerged, enabling retail investors to join these initiatives. Allianz SE. ([ALV.DE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=alv.de)), Axa S.A., State Street Corporation ([STT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SST)), TIAA-CREF, BlackRock Inc. ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BLK)), AXA World Funds, and HSBC Holdings PLC ([HSBC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=HSBC)) are among the investment companies and asset management firms that have sponsored green bond [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) or exchange-traded funds (ETFs).

### 2008

The year when the World Bank issued the first so-labeled green bond for institutional investors.

## Case Studies: Impactful Green Bond Initiatives

[The World Bank](https://www.investopedia.com/terms/w/worldbank.asp) is a major issuer of green bonds. In 2022, the last year for which data is available, it reported $40.8 billion in bonds issued, $28.2 billion in funds disbursed, and $33.1 billion in new lending committed. Previously, the bank had reported issuing $14.4 billion in green bonds from 2008 through 2020. The funds went to projects for energy and efficiency (33%), clean transportation (27%), and agriculture and land use (15%).

One of the bank’s first green bond sales financed the Rampur Hydropower Project, which provided low-carbon hydroelectric power to northern India’s electricity grid. Financed by issuances of green bonds, it produces almost 2 megawatts per year, preventing 1.4 million tons of carbon emissions. In 2022, its combined projects lowered carbon emissions by 8.4 million tons.

## Diverse Types of Green Bonds: An Overview

Green bonds finance environmental projects, but details vary by issuer, use of funds, and bondholder rights during liquidation:

*   **“Use of proceeds” bonds**: These instruments are dedicated to financing green projects, but should the issuer liquidate, the lenders have recourse to the issuer’s other assets. They have the same credit rating as the issuer’s other bonds.
*   **“Use of proceeds” revenue bonds or asset-backed securities**: These securities may finance or refinance green projects, but the collateral for the debt comes from streams of revenue collected by the issuer, such as taxes or fees. States and municipalities often opt for this type of setup when issuing green bonds.
*   **Project bonds**: These are limited in scope to a particular underlying green project, meaning that investors have recourse only to assets related to the project.
*   **Securitization bonds**: These gather a group of projects into a single debt portfolio, with bondholders having recourse to the assets underlying the complete set of projects.
*   **Covered bonds**: These debt instruments finance a group of green projects known as the “covered pool.” In this case, investors have recourse to the issuer, but if the issuer can’t make debt payments, then bondholders have recourse to the covered pool.
*   **Loans**: Financing for green projects may be [secured](https://www.investopedia.com/terms/s/secureddebt.asp) (backed by collateral) or unsecured. With unsecured loans, lenders have full recourse to the borrower's assets. For secured loans, lenders can access the collateral.  
    

##  A Guide to Investing in Green Bonds

Investments in green bonds often come from institutional investors, mutual funds, hedge funds, and endowments that can afford to invest large sums in debt instruments. However, many mutual funds and ETFs offer exposure to the green bond space for retail investors who want to align their portfolios with their environmental sensibilities and values.

For example, the iShares USD Green Bond ETF ([BGRN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BGRN)) tracks the performance of an index comprising [investment-grade](https://www.investopedia.com/terms/i/investmentgrade.asp) bonds that finance environmental projects. While the ETF focuses only on U.S. dollar-denominated debt, it includes bonds from non-U.S. issuers and U.S.-based borrowers.

While ETFs like BGRN are readily available through a brokerage account or online platform, retail investors who want to buy individual green bonds have a slightly more complex situation. Your broker may allow you to invest in individual bonds, but when purchasing green bonds from corporate issuers, you may be subject to minimum deposits, maintenance fees, and commissions. Government-issued green bonds may also be available to buy through your broker or directly from the issuer.  

## What's a Major Challenge When Buying Green Bonds?

When buying green bonds, you might have several challenges. Transparency and reporting can create a bit of homework, as you'll want detailed information about the use of proceeds and the environmental impact of funded projects. Also, the green bond market is still developing, and some bonds may have lower [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) than traditional ones, making it harder to buy or sell at desired prices and times. The lack of a universal standard in the green bond market can create confusion about what qualifies as a green bond, and there are no binding regulations for the nongovernmental standards often used.

## How Are Green Bonds Different From Blue Bonds?

Blue bonds are sustainability bonds used to finance projects that protect the ocean and related ecosystems. They might support sustainable fisheries, protection of coral reefs and other fragile ecosystems, or reducing pollution and acidification. All blue bonds are green bonds, but not all green bonds are blue bonds.

## How Are Green Bonds Different From Climate Bonds?

“Green bonds” and “climate bonds” are sometimes used interchangeably, but some authorities use the latter term specifically for projects focusing on reducing carbon emissions or alleviating the effects of [climate change](https://www.investopedia.com/the-green-investor-podcast-episode-1-5212965). The Climate Bonds Initiative has set standards for certifying climate bonds.

## How Do I Know If a Green Bond Is Actually Green?

Despite efforts like those of the Climate Bonds Initiative, there is no universally recognized standard for determining the environmental friendliness of a bond. Sometimes, debt instruments may be marketed to investors as “green” even if their positive environmental impact is dubious at best. Examples of [greenwashing](https://www.investopedia.com/terms/g/greenwashing.asp)—making exaggerated or misleading ecological claims—highlight the need for investors to carry out due diligence regarding potential green bond purchases. In addition to the Climate Bonds Initiative, other companies provide assessments of bond issuers’ environmental claims, including Bloomberg L.P., rating agencies such as Moody’s, and other specialized firms.

## The Bottom Line

Green bonds offer a way to invest in projects with a positive environmental impact, such as renewable energy and sustainable water management. These debt instruments can provide tax benefits, making them an attractive option for eco-conscious investors.

However, the market's lack of standardized regulations means investors must conduct thorough due diligence to ensure bonds genuinely fulfill environmental promises. As the green bond market continues to grow, staying informed about the developments and credibility standards is crucial for making educated investment decisions.

> **Article Sources**
>
> 1.  Municipal Securities Rulemaking Board. "[About Green Bonds](https://www.msrb.org/sites/default/files/About-Green-Bonds.pdf)."
>     
> 2.  Raj M. Desai, et al., eds. "[From Summits to Solutions: Innovations in Implementing the Sustainable Development Goals](https://www.brookings.edu/books/from-summits-to-solutions/)," Pages 67-79. Brookings Institution Press, 2018.
>     
> 3.  World Bank. "[Green Bond Impact Report](https://treasury.worldbank.org/en/about/unit/treasury/impact/impact-report)."
>     
> 4.  Climate Bonds Initiative. "[Climate Bonds Standard Board](https://www.climatebonds.net/standard/governance/board)."
>     
> 5.  The European Commission. "[Green Bonds: New Study Shows Extraordinary Growth and Signals Potential in Financing Europe’s Climate and Environment Goals](https://ec.europa.eu/commission/presscorner/detail/en/IP_16_4217)."
>     
> 6.  Bloomberg. "[Green Bonds Reached New Heights in 2023](https://www.bloomberg.com/professional/blog/green-bonds-reached-new-heights-in-2023/)."
>     
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>     
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>     
> 10.  The World Bank. “[The World Bank Impact Report 2022: Sustainable Development Bonds and Green Bonds](https://thedocs.worldbank.org/en/doc/33420eed17c2a23660b46dc208b01815-0340022023/original/World-Bank-IBRD-Impact-Report-FY22.pdf),” Page 15.
>      
> 11.  The World Bank. “[The World Bank Impact Report 2020: Sustainable Development Bonds and Green Bonds](https://issuu.com/jlim5/docs/world-bank-ibrd-impact-report-2020?mode=window),” Pages 100–101.
>      
> 12.  Climate Bonds Initiative. “[Explaining Green Bonds](https://www.climatebonds.net/market/explaining-green-bonds).”
>      
> 13.  iShares. “[BGRN: iShares USD Green Bond ETF](https://www.ishares.com/us/products/305296/ishares-usd-green-bond-etf).”
>      
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>      
> 15.  World Economic Forum. “[Blue Bonds: What They Are, and How They Can Help the Oceans](https://www.weforum.org/agenda/2019/06/world-oceans-day-blue-bonds-can-help-guarantee-the-oceans-wealth/).”
>      
> 16.  Climate Bonds Initiative. “[Frequently Asked Questions; Standard](https://www.climatebonds.net/resources/understanding/faqs).”
>      
> 17.  Bloomberg Professional Services. “[What Are Green Bonds and How ‘Green’ Is Green?](https://www.bloomberg.com/professional/blog/green-bonds-green-green/)”