Green
Bonds
History of Green Bonds
•In 2007, the Intergovernmental Panel for Climate Change linked the global warming and
human activity. It prompted several Swedish pension funds to consider financing projects
that contributed positively to the environment.
•In 2008, the World Bank issued its first green bond in response to such increasing demand.
Since then the market has grown considerably.
•Today, more than 50 countries have issued green bonds, with the United States being the
largest source of green bond issuances. According to the organization Climate Bonds, global
green bond issuance in 2020 was estimated to be $350 billion.
Green Bonds Principles
Use of proceeds
• are channeled exclusively into projects that yield clear and measurable environmental benefits.
• This dedicated allocation ensures that the capital raised serves the intended purpose of fostering
sustainability.
Project evaluation and reporting
• Issuers are obligated to assess the environmental impact of the funded projects systematically.
• Transparent reporting mechanisms further enhance accountability, allowing stakeholders to
scrutinize the effectiveness of green bonds in meeting their intended environmental objectives.
Management of proceeds
• Effective management of proceeds is a cornerstone principle.
• This principle emphasizes the need for clear governance structures and strategies to track and
allocate funds.
Reporting
• Transparency is a robust reporting mechanism, where issuers provide clear and detailed accounts
of the environmental impact of the funded projects.
Abstract
• Green bonds are an increasingly popular financing tool for renewable energy, zero-
emission transport, or green buildings.
• Advantages of green bonds are compliance with ESG standards, hedging of climate
risk, and reputational benefits.
• Disadvantages include transaction costs, lack of uniform standardization, or the risk
of greenwashing – particularly when issuing sustainability-linked bonds.
Objectives
• This paper aims to provide an in-depth study on the development and
obstacles of the green bonds market in Poland, a country undergoing
decarbonization and energy transition.
Data collection
• Data from the Climate Bonds Initiative from 2014 to 2020 (and some from 2021) was
utilized in this research.
• The article also discusses sustainability-linked bonds and the risk of 'greenwashing'
in the Polish bond market.
• The data for 2022 was not available at the time of publication.
Introduction
Climate instability and natural disasters impact the economy. Climate issues are
challenging for the financial sector, with financial innovations like green bonds
playing a key role in addressing climate risks.
Green finance, combining finance and environmental care, sets new standards in
sustainable finance.
Green bonds are crucial for financing renewable energy and green infrastructure
globally.
Sovereign green bonds are a
type of green bond issued
The use of green bonds in Poland is widely discussed due to the high capital
by national governments to
raise funds for projects and
expenditures needed for decarbonization and transformation in the energy sector.initiatives with
environmental benefits.
Poland issued the world's first sovereign green bonds in December 2016,
contributing significantly to the green bonds market. Compliance with ESG
standards is crucial in business to avoid financial risks.
Green Finance
The sustainable finance system
was created in response to the
implementation of sustainable
development principles, enabling
financing for projects benefiting
climate and environmental
protection and pro-ecological
energy sources.
Sustainable finance aims to create value for
shareholders, stakeholders, and the common good over
different time horizons, emphasizing social and
environmental impacts in the long term.
Green Finance
• There is no universal definition of green finance due to the lack of a
uniform taxonomy, leading to varying definitions across different
sectors and regions.
• Green finance is a versatile financial tool that can be applied broadly to
promote sustainable development and environmental protection.
• Green finance focuses on three main areas (Lindenberg, 2014, p. 3):
• Financing of public green policies related to sustainable development
• Green financial system, for example, green bonds
• Financing of green investments that meet specified environmental standards
Table 2. Various definitions of green finance
Green Finance
The International Development Finance Club report identifies: tools should be
compatible with environmental, social, and ethical objectives.
Green finance offers a wide range of financial tools, among which we can
distinguish
• Green bonds
• Environmental funds
• Weather derivatives
• Nature-linked securities
• Green investment funds
• Ecological options
Green Finance
Figure shows the most important investment directions that are financed with green
finance.
Two main areas can be distinguished: energy sources and efficiency and climate change
mitigation and adaptation (left side) and environmental aspects (right side) and support to
circular economy. Green
Finance
Climate
change Reducing
adaptation industrial
and pollution
mitigation
Circular
Renewable economy,
s source of waste
energy processing,
recycling
Environme
Energy
ntal
efficiency
concern
Literature review—green bonds
• Green bonds can be classified as one of the most significant financial innovations in
recent years (Maltais & Nykvist, 2021, p. 1).
• The distinction lies in the objective of the funds raised using this method, the purpose of
which is closely linked to the pursuit of environmental, climate, and social objectives.
• Thus, compared to vanilla bonds, which finance the working capital of the issuer, green
bonds focus on financing pro-environmental and pro-social goals. It should also be
stressed that the purchaser of a green bond lends its funds to the issuer and is therefore
not directly exposed to the financial risk of the projects financed by the issue (Gemra,
2021, p. 32).
• This creates a favorable circumstance for investing in green bonds and makes it easier for
investors seeking to raise capital from this source to proceed with green investments.
Literature review—green bonds
“climate bonds’ is also sometimes used in the academic literature to
emphasize the use of emissions funds for adaptation and mitigation of
climate change.
“transition bonds”, specifying the use of funds for the purposes of energy
transition (KPMG, 2021, p. 15).
Characteristics of green bonds
• The most important characteristics of green bonds identified as follows
(Laskowska, 2019, p. 49):
innovative financial instrument
debt security
different classification—for example, based on the type of issuer
(corporate, municipal, government) or the type of interest method (fix or
float)
purpose, which is to finance and refinance investment projects
the possibility to spend all or part of the funds raised from the issuance
the use of funds obtained from issuance is possible only for pro-
environmental purposes
Literature review—green bonds
Green bonds, as already mentioned, are intended to
support environmental, pro-climate, and pro-social
projects. The heterogeneity of the definition of green
bonds as well as the geographical diversity of their use is
reflected in the lack of clear, precise, and universally
applicable issuance standards.
Green Bond Principles (GBP)
GBP considers four criteria for a bond to be considered green (Voluntary Process
Guidelines for Issuing Green Bonds, 2021, pp. 4–6; Sartzetakis, 2020, p. 768):
• Use of Proceeds—for instance: renewable energy, energy efficiency, pollution
prevention and control, and environmentally sustainable management of living natural
resources and land use
• Process for Project Evaluation and Selection
• Management of Proceeds
• Reporting—most of the standards require enclosing following information:
o A list of projects and the amount of the proceeds which has been allocated
o Unallocated proceeds and the way they were managed
o Short description and up-to date information about project’s progress
o Project’s environmental benefits
Climate Bond Initiative (CBI)
The CBI focuses on analyzing the particular sector of the economy in which the issuer operates and indicates the precise criteria that
must be met by entities in the sector in order for the bonds thus issued to be considered green (Gemra, 2021, p. 33). The
categorisation of existing types of green bonds can be done on the basis of three main factors (Laskowska, 2019, p. 113; Laskowska,
2020, pp. 49–50):
• Type of issuer—seven types of green bonds can be distinguished:
o supranational, quasi-state, agency green bonds – issued by, e.g., The World Bank, governmental agency, etc.
o corporate green bonds
o bonds issued by financial sector, e.g., commercial banks
o municipal green bonds
o governmental green bonds issued by the state
o income green bonds: repayment is based on revenues from a single or multiple investment projects financed by a given debt
emission
o green asset-backed securities (ABS): a debt security issued in a securitisation that is based on various types of underlying
assets that serve as collateral for financial assets
• Protecting investors’ interests:
o Secured green bonds: decreasing the exposition on the financial risk for bondholders
o Unsecured green bonds
• Emissions certification:
o Labelled (certified) green bonds – compliance with internationally accepted green bond standards, increasing the reliability of
the investor and the emission
o Unlabelled (uncertified) green bonds
Corporate green bonds
The dynamic development of corporate green bonds has led to the
emergence of a number of new types of this instrument (Lipowicz, 2020, pp.
124–125):
• Standard Green Use of Proceeds Bond: in compliance with GBP, with
recourse to the issuer
• Green Revenue Bond: in compliance with GBP, without recourse to the
issuer, an exposure to credit risk
• Green Project Bond: project bond with or without recourse, in compliance
with GBP, emission taken so as to finance a one or more pro-ecological
investment; investor is exposed to the risk associated with the project
• Green Securitised Bond: in compliance with GBP, collateralised by one or
several proecological projects, these may include covered bonds, asset-
backed securities (ABS), mortgage-backed securities (MBS), and other
structures
Green
Bonds
advantages of green bonds disadvantages of green bonds
- The three incentives for issuing green bonds are - There are no uniform standards and regulations for
broadening the investor base, lowering capital costs, and classifying bonds as green. In turn, simply applying
meeting investor demand for sustainable investment for a certificate of compliance with the standards
products. generates further costs. In the event of
noncompliance with the obligations outlined in the
- ‘that green bonds, as debt financing instruments, could issue, issuers may be fined
help spread the costs of transformation in a more
equitable and conscientious manner over generations.’ - If the investment fails, the issuer risks reputational
Thus, it represents a combination of environmental and damage
social aspects. - Relatively small market for green bonds, which is
- Lower volatility of price in the secondary market, the seen as a disadvantage, despite the continued
possibility of higher investor demand leading to dynamic development of this sector.
oversubscription, and an increase in issue size, and - The lack of sufficient regulation and uniform
access to a source of funding with a longer maturity standardization may encourage the occurrence of
- Allows investors to diversify and reduces the risk of greenwashing
fluctuations in demand for the instrument. - Insufficient and decentralized regulation, shaped
- Finance new projects for the construction of renewable by private sector actors, results in the recognition of
energy sources or to protect the climate and the bonds as green being at the discretion of third
environment; both environmentally and socially useful. parties (private actors), and standards vary between
certifiers. As a result, the ‘greenness’ of bonds is
- The implementation of ESG and sustainable not clearly and precisely verifiable (Flammer, 2020,
development principles; building trust on the part of p. 96).
investors and improving the image of the issuer
Worldwide and European Green Bonds Market
Development
Worldwide and European Green Bonds Market
Development
Worldwide and European Green Bonds Market
Development
Green Bonds Market Development in
Poland
Green Bonds Market Development in Poland
Green Bonds Market Development in Poland
In 2020, Poland saw the first issuance of corporate green bonds. Cyfrowy Polsat Group
S.A from the ICT sector issued green bonds worth PLN 1 trillion, with a maturity of
seven years and a floating interest rate tied to Polish WIBOR 6M. The proceeds would
be used to enhance energy efficiency and reduce carbon footprint.
Energy and fuels companies like PKN ORLEN also issued green bonds, with one issue
lacking external verification and another certified by CBI.
TAURON and other energy entities invested in photovoltaics.
Famur and Globe Trade Centre focused on decarbonization and green building projects,
respectively.
Additionally, banks like mBank, PKO Mortgage, and ING Mortgage in the financial sector
issued green bonds, with most having a Second Party Opinion and CBI certification.
Green Bonds Market Development in
Poland
The raised funds were intended for various sustainable projects.
Municipal bonds have been a small part of Polish municipalities' debt structure, with loans being the
main source of capital.
Municipal green bonds are not very popular in Poland, with only the city of Łódź issuing them for
specific projects.
The municipal green bond market in Poland is still in its early stages.
Issuing municipal green bonds comes with higher costs and does not offer economic incentives.
Nonfinancial companies are the main issuers of green bonds in Poland.
Nonfinancial entities dominate the volume of green bonds and sustainability-linked bonds issued in
Poland.
Green bonds have the largest share of the issuance volume in Poland.
Mortgage banks issue green covered bonds, accounting for 8.5% of the total issuance volume.
Barriers to the Green Bonds Market
Development—the Polish Case
Barriers can be categorized into institutional and market barriers, according to Banga
(2019).
Institutional barriers include:
• the lack of a unified standard for issuing green bonds,
• legal risks such as the '10H rule' blocking investments in green projects,
• regulatory uncertainty,
• and political instability in energy and climate policy.
Market barriers include:
low emission volume being mitigated, currency of issuance, and high transaction costs.
• The small size of emissions and insufficient volume lead to higher transaction costs and lower liquidity in the
market.
• Currency of issuance poses currency risk, with most issuances in RMB, USD, and EUR.
• High transaction costs are related to green label certification and publishing project documents to demonstrate
fund allocation.
• Lack of green investments, limited investment opportunities, and unclear economic benefits from issuing green
bonds are major barriers in Poland's market.
• Insufficient supply of green bonds compared to investor demand, particularly in corporate bonds, is also a
significant challenge for market development.
Barriers to the Green Bonds
Market Development—the Polish
Case
Green bonds issued by companies in various industries are being scrutinized by investors for their
environmental credibility. However, the issuance of green bonds and sustainability-linked bonds may open the
door to greenwashing, especially for the latter as they do not have to adhere to the same strict standards.
Minimum criteria should be put in place to avoid sustainability-linked bonds being used for greenwashing.
Even certified green bonds can be affected by greenwashing, with manufacturing sectors being at higher risk.
Investors are advised to focus on municipal and corporate green bonds in the services sector to minimize
exposure to greenwashing risks.
The risk of greenwashing is higher in sustainability-linked bonds compared to green bonds, posing a threat to
investor confidence in green finance instruments. This undermines the idea of green finance and could deter
investors, stakeholders, and the public from supporting green initiatives.
Overall, the rise of sustainability-linked bonds could erode trust in certified green bonds and increase the risk
of greenwashing, hindering the growth of green finance.
Conclusions
Investors face pressure to prioritize environmental impacts in investment decisions, with
green finance funding sustainable projects. Green bonds are popular for financing green
projects but face challenges with limited availability compared to demand. Benefits of
green bonds include hedging against climate risk but drawbacks include high transaction
costs. Sustainability-linked bonds may be used for greenwashing. Green bond market in
Poland growing despite barriers like legal risks and high costs.
