Twelve years ago, the World Bank issued the world’s first-ever green bond (bonds issued to fund sustainable projects, such as renewable energies or waste management infrastructures). Today, their popularity is rising fast. Although they still account for a fraction of the value of the overall bond market, issuers are choosing this type of sustainable debt securities because of the positive impact they have on society.
Even though sustainable finance has been a fundamental issue in the social agenda for many years now, thanks to the 2015 Paris agreement on climate change, the world became aware of the environmental risks and economic impact resulting from the effects of climate change. However, it is not just society that is increasingly more aware. The financial industry is also contemplating climate change and the Sustainable Development Goals (SDGs) as relevant factors to determine their investment strategy.
To be granted green bond status, an issue needs to undergo a series of audits and comply with the so-called ‘Green Bond Principles’. Current technological and digital tools are allowing to significantly simplify and expedite the otherwise complex arrangements, thus contributing to drive their popularity. Indeed, the use of ‘blockchain’ and Distributed Ledger Technologies (DLT) allows storing information in a completely secure and fully traceable, immutable manner, simplifying the transaction and increasing the transparency thereof.
The use of DLTs in the issue of green bonds by banking and other institutions is the focus of Blockchain: Gateway for sustainability linked bonds, a report by UK lender HSBC, which shines the spotlight on two of the standout features of this type of operations: sustainability and technology. The use of blockchain and encryption algorithms can help boost confidence in the bond market, and HSBC underscores the opportunity that this technology represents for the green bond market and its complete digitization. The value, according to the report, is particularly relevant in three key stages of the issue: structuring, and distribution; transfer of ownership, payment and settlement; and proving the relevant impact of the investment project.
According to the HSBC report, there are two main benefits of using blockchain for green bond issues: efficiency and credibility. Thanks to blockchain, securities are more efficient because they save costs, time, and prevent third party meddling. The foundation of the green bond structuring and negotiation is a smart contract, capable of automating all complex steps and of creating competitive advantages for issuers and investors. Also, thanks to the technology’s built-in encryption features, the transfer of value and the token-based issue virtually fraud-proof.