Green bonds are debt securities issued to raise money specifically for environmentally friendly projects. Governments, companies, or financial institutions use the funds to finance initiatives such as renewable energy, energy efficiency, clean transportation, or climate adaptation projects.
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Green bonds combine traditional bond features with a focus on sustainability.
Like regular bonds, green bonds pay periodic interest and return the principal at maturity. The main difference is that the proceeds must be used for projects with environmental benefits. Issuers often provide reporting to show how the funds are allocated and what impact they generate.
While green bonds can attract investors who prioritize sustainability, they still carry risks such as interest rate risk and credit risk, similar to conventional bonds.
Short example:
Suppose a government issues a green bond worth $100 million.
The money is used to build solar power plants.
Investors receive annual interest payments, and at maturity the government repays the principal, while the funded projects aim to reduce carbon emissions.
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