What future CFOs should know about green bonds

As we move past the worst of the Covid-19 pandemic, senior leaders in the public finance world must shift their thinking from short-term recovery to longer-term sustainable development. Many local authorities in the UK have declared climate emergencies, so naturally, green finance will form an integral part of economic recovery.

An understanding of green bonds and how they can be used to bolster recovery is a necessity for CFOs. The world around us is changing, and green investments will play an important role in many aspects of the public sector – from infrastructure projects to social services.

Green bonds have the power to completely change an organisation’s finances – and as public sector organisations continue recovering from the pandemic, they are well placed to take advantage of the wealth of opportunities they provide.

Green bonds are loans that are reserved for the purpose of financing projects that will have a positive environmental impact. For local authorities, this could for example mean green infrastructure projects, solar energy or transportation.

Local authorities can take advantage of multiple types of green bonds with different environmental aims. While sustainability bonds focus on both green projects and providing social impact, social impact bonds focus exclusively on positive social outcomes such as financing social care and schools.

These types of bonds are only a small part of the environmental, social and governance (ESG) movement, which many leaders in the sector have made public commitments to along with their responsible investment targets. This, along with other social movements, is having a significant impact on the way governments, corporations and local bodies operate globally. Changes in government priorities in recent years have contributed to the rapidly growing bond market.

Local authorities play an incredibly important role in shaping policy and achieving climate objectives. With 160 authorities having declared climate emergencies in the UK, most with the goal of achieving net-zero emissions by 2030, they can use their powers in relation to infrastructure and key public services to help deliver their ESG ambitions. If the 2030 deadline is to be met, green bonds will become a significant part of making it happen.

The UK Municipal Bonds Agency recently announced that it will look to issue green bonds in the future, which presents an ideal scenario for local authorities, large and small, to take advantage of the opportunity to work together on green investment projects. Potentially, this could be even more cost-effective than the Public Works Loan Board as a method for funding new infrastructure projects.

These new green opportunities will be extremely important for the CFO of the future to master and implement as tools for lasting economic recovery post-pandemic. As long-term financial sustainability is critical for guaranteeing effective delivery of public services in the future, we should be keeping innovative new methods at the forefront of our minds.

by Rob Whiteman, CEO, CIPFA