The green bonds market suffers from a lack of liquidity and high entry barriers. Tokenizing green bonds via smart contracts based on distributed ledger technology enables an automated, compliant, verifiable, and tamper-proof manner to finance green projects, bringing liquidity to this closed market. Tokenized green bonds democratize the green-investment accelerating the transition to a more sustainable future.

Tokenized green bonds lower entry barriers significantly and solve many industry challenges, such as high transaction costs, audibility, and high minimum investment size.

Digital securities exist as tokens on a distributed ledger and do not require intermediaries. Therefore trades can be settled 24/7 in near real-time. Furthermore, by improving accessibility and the possibility of trading the asset on a secondary market, more and different types of investors can invest in securities that before could not enter the market.

Digital securities also enable fractional ownership of assets, further lowering the entry barrier for investors and creating liquidity in less liquid markets like private equity and real estate.

Because of the distributed nature of a DLT, no single party can alter the data, creating a secure single version of the truth, which all participants can access and rely on, including advisers, auditors, and regulators.

Digital securities automatically record administrative tasks of purchasing and selling securities, including corporate actions like the payout of dividends. As a result, digital securities have lower operational costs.

The lifecycle of Algorand-based tokenized bonds

Digital Green Bonds

Digital bonds are decentralized tokens issued and managed on a blockchain infrastructure platform. By using blockchain, and the underlying distributed ledger technology, issuers can provide access to an immutable record of all transactions of the green bonds.

The tokenization of green bonds enables the participation of institutional and private investors in green projects. In addition, the decentralized nature of blockchain technology eliminates the need for a third-party intermediary to validate and approve transactions, making near real-time automated settlements a reality and opening up the possibility of buying and selling green bonds on the secondary market.

Issuing bonds involves many stakeholders. Tokenizing security bonds standardize and automate the issuance, administration, management, and settlement with the goal to reduce costs and improve efficiency.

The credibility of green bonds

One of the significant concerns of green investment is ‘greenwashing,’ referring to projects that pretend to be green but have little impact on sustainability. With the Green Bond Principles (GBP) guidelines for green investing vehicles, there is much more clarity about what green is and how to measure environmental impact.

Tokenized green bonds are audited by third-party green validators. The green bonds are regulatory compliant, transparent, and fully auditable. GBP green bonds will increase the credibility of climate-smart investments that are in line with the Paris Agreement goals of low greenhouse gas emissions and climate-resilient financial flows.

The European green bond standard (EUGBS) is a voluntary standard to help scale up and raise the environmental ambitions of the green bond market. International: Green Bond Principles (GBP), Social Bonds Principles (SBP), Sustainability Bonds Guidelines (SBG), Climate Bonds Taxonomy, and Climate Bonds Standards.

Who can issue green bonds?

Any organization with suitable green projects or assets can issue green bonds to raise capital. Sustainable green assets include, among others, renewable energy, low-carbon transport, low-carbon buildings, sustainable water, waste management, sustainable land use, and climate change adaptation measures.

Green bonds market size

Green bonds are becoming more and more popular. The green bond market, both globally and at EU level, grew by an average of 50 % per year in the period 2015-2020. Nevertheless, it represented only 3 to 3.5% of overall bond issuance in 2020.

• US$ 1,000,000,000,000 of yearly global issuance in 2023
• EU 50% US$ 500,000,000,000

Even though forecasts predict it will reach US$1 trillion of yearly global issuance in 2023 (see Figure 1), there is a need for the more rapid growth of a high-quality green bond market to achieve the targets in the Paris Agreement.

Source

Green bonds market insights

• Esma: Environmental impact and liquidity of green bonds
• Baker McKenze rapport: Critical challenges facing the green bond market
• Climate bonds: Sustainable Debt Global State of the Market 2021
• Van Eck: Green Bonds and the Pathway to Sustainability
• European Commission: Overview of sustainable finance
• United Nations: Environment Programme Finance Initiative
• United Nations: Sustainable Finance in Emerging Markets
• Climate bonds: Sustainable Debt Market Summary H1 2022
• European Investmet Fund (EIF): Climate & Infrastructure funds
• InvestEU Fund: Technical guidance on sustainability proofing

Tokenization video’s

The lifecycle of Algorand-based tokenized bonds (10:31)
Tokenizing carbon credits recorded webinar (31:02)

How to create Digital Green Bonds

1. Define your green project goals, criteria, and assets.
   External auditor and validator: an external party confirms compliance with the green bond guidelines and standards, including verifying and validating criteria and assets.
2. Proof submitted on the blockchain
   Submit an immutable proof on the blockchain that is accessible and auditable for all stakeholders.
3. Tokenization of green bonds
   Easily issue and manage the green bonds, including user management and compliance tools. In addition, NEXUS enables custom token ecosystems in which you can easily manage a variety of stablecoins and digital security tokens. For example, issuing stocks, bonds, and dividends are all possible with NEXUS
4. Stablecoins
   Stablecoins are an enabler for a thriving token economy. They make processes such as dividend payouts more efficient and provide liquidity by connecting green bond tokens to the existing fiat system. Moreover, the configuration can be limited to the issuance of private stablecoins for a limited network.

Algorand peer-to-peer based platform for tokenised bonds and eMoney

By: Algorand Foundation