Green Bonds: an alternative source of financing in the Era of Climate Change

Abstract

Climate change is one of the greatest challenges of modern society. From the first studies at the end of the 19th century up to the consequences of the Covid-19 pandemic, it has been increasingly clear that global warming will influence our way of life from a social, economic and financial point of view. The studies carried out during the recent years clearly demonstrate the dangers and costs of a possible lack of action to limit CO2 emissions into the atmosphere and, in the same way, show the benefits that would result, in the long term, from the halving of emissions. In this context, the Paris Agreement appears to be the cornerstone of the fight against climate change, with which the signatory States set the objective of limiting the increase of 1.5 °C in global temperature, compared to pre-industrial levels. In order to achieve this objective, the investments and the financial markets play a key role. The necessary investments will have to be increasingly substantial and the creation of new financial instruments to stimulate the energy transaction is a concrete way of combating global warming. This is what climate finance is about, defined by UNFCCC (United Nations Framework Convention on Climate Change) as “local, national, or transnational financing - drawn from public, private, and alternative sources of financing - that seeks to support mitigation and adaptation actions that will address climate change.” Therefore, the role of the actors of the climate finance – from the public actors that must necessarily be the guide against climate change, to the private actors that must be encouraged to invest in “green” projects making sustainable not only the environment around us but also the financial markets – is fundamental. A global sustainable future is closely linked to the future of the energy sector, which will be studied in this thesis in a deeper way than other sectors. The transition from the use of high-carbon energy sources to the energy production from renewable sources, such as photovoltaic, wind and hydroelectric, is a first step towards a sustainable future. In such a context, climate finance may play a key role, proposing innovative financial instruments that foster investments in a "green" direction. In particular, the Green Bonds represent an alternative financing instrument to the classic sources of financing. Initially issued by supranational financial institutions, in recent years there has been an exponential growth in the use of this instrument, driven by climate agreements and by the increasing sensitivity of international organizations to the environmental sustainability issue. In lights of this, the aim of this thesis is to study climate change and climate finance, analyzing the Green Bonds as an alternative financial instrument with respect to more classical methods. In particular how, in the field of renewable energy, the issue of a Green Bond can be a valid alternative to Project Financing, an instrument certainly better known and more used in the last decades. The thesis begins by describing the risks of climate change (Chapter 1) and then focuses on the role of climate finance, studying in depth the public and private actors and the tools used to combat climate change (Chapter 2). Green Bonds will be then analyzed, from the first issues to the exponential growth in recent years, studying the risks and benefits of this innovative tool (Chapter 3). The last part (Chapter 4) will be dedicated to the comparison between the issuance of Green Bonds and Project Finance. To pursue this goal, a case study will be proposed, where it will be analyzed, with a financial model, how the issue of a Green Bond could be a valid alternative in the renewable energy sector in the Italian market.