Green bonds are fixed income debt securities where the proceeds are exclusively applied to projects or activities that promote climate or other environmental sustainability purposes.
The underlying index screens for four criteria specified in the Green Bond Principles published by MSCI ESG Research. First off, proceeds must fall within at least one of six eligible environmental categories defined by MSCI ESG Research, including alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaption. The other three criteria include the existence of processes for green project evaluation and selection, the existence of processes for management of proceeds, and the existence of a commitment to ongoing reporting of the environmental impact.
“The green bond market allows investors to direct funding toward environmentally beneficial projects while maintaining their fixed income asset allocation,” Ashley Schulten, Head of Responsible Investing for Global Fixed Income at BlackRock, said in a note. “This should help broaden support for the green bond market and thus, the needed projects it is funding.”
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