There is more demand for green bonds and sustainable finance products than there is supply across all geographies, sectors, and ratings bands.

This supply–demand imbalance is likely to continue and perhaps become even more stark. Many cite this supply–demand dynamic as driving the lower funding costs for some green bonds.

Strong Investor Appetite

Investor engagement is a key part of labeling a bond and the increased transparency enjoyed by labeled bond investors is likely to be a lasting shift resulting from the rise of green, social, and sustainable bonds.

Many issuers of green bonds have found that they have much more market power in their labeled transactions compared to normal issuance dynamics. Some have used investor selection processes to assist with aligning issuance distributions with investor credentials.

Some green bond issuers have benefited from reverse inquiries from investors who are looking to provide capital to the issuer outside of the defined bond issuance transactions, with resulting low transaction costs for the issuer.

Green, Social, and Sustainable Portfolios

Most investors in green bonds also have mandates to invest in bonds labeled as social or sustainable. Investors are very encouraging of issuers to explore these other labels as well.

There is important guidance available on labeling bonds as either social or sustainable, similar to the use of the Green Bond Principles for green labeling, based on the Social Bond Principles and the Sustainable Bond Guidelines available on the International Capital Market Association website.

Many governments have a wide variety of projects, assets, and expenditures that cover a broader range of priorities than just environmental aspects (i.e., green). A broader labeling regime—including green, social, and sustainable projects and assets—has been successfully used by a variety of government issuers.

Tracking the Stacks

Many green bond issuers have large portfolios of green projects and assets, and they will issue multiple green bonds (or green loans) over time.

When tracking the net proceeds from the green bonds and the value of the green projects and assets, most issuers will have two stacks in their tracking system. This is to ensure that the total value of the green projects and assets is always more than the total outstanding value of the green bonds issued.

Some issuers will allocate specific projects and assets to particular green bonds, while other issuers will look at the broader portfolio of green projects and assets as a single piece.

Efficiencies and Transaction Costs

As described in the overview, the first green bond issuance is challenging but worth the effort. Following an initial issuance, the vast majority of green bond issuers say that they will definitely issue another green bond.

Issuers that present a program of green bonds (or other labeled instruments) are inherently more attractive to investors as they hold the prospect of reduced due diligence for future transactions.

The costs and resources required to establish the necessary frameworks and internal processes are generally frontloaded, meaning that the effort required for the second green bond is substantially less than for the first, while the effort for the third is less than the second, and so on. As further green issuance occurs, the extra effort from the issuer for labeling continues to decline.

The Climate Bonds Standard includes a formal approach to this situation called Programmatic Certification. This streamlined approach is being used by a variety of frequent issuers in the green bond market.