Incentive schemes paired with a pressure to invest green have transformed the market for green bonds. Green bonds are fixed-income instruments that go towards funding projects for the climate and environment – a clever way of making a return on income whilst giving support to an important cause. Without incentives, institutional investors may see these as less valuable, with only one motivation for purchasing them – in order to appear ESG friendly. Governments are aware of the necessity of green investments in order to fund transformational projects – be it by research and development or through funding physical capital.
As a result, they have employed a variety of incentives and programmes to allow these bonds to prosper.
As covered in one of our previous articles
, COVID-19 has helped accelerate the drive towards green bonds through the strong performance of ESG funds and the greater focus on sustainability.
The moral incentive to invest green is painstakingly clear; the UK have an ambitious goal to become ‘carbon-zero’ by 2050 but is rooted in the understanding of the dire need to shift away from fossil-fuels and look for sustainable alternatives for the long-term. The multitude of problems facing society over the next few decades span widely from clean water to pollution to global warming; without institutional change these issues will only become worse, leaving future generations an even worse situation. It is imperative for finance to be raised for the green projects which will allow governments to meet the all important agreements made in the 2015 Paris Summit.
The UK’s Green Finance team in 2018 made a variety of recommendations on how ‘the Government should provide short-term incentives to pump prime the green consumer loans and green mortgage markets’ 
. One of these being green tagging to point out whether the activities the investment is financing is ‘green’, ‘brown’, or ‘neutral’ in order to make the impact of the bond more clear. Compared to ESG criteria, this has a greater focus on the environment in particular – although the recent rise in popularity of ESG as a rating may mean green-tagging is no longer as relevant.
Additionally, they also suggested that the UK’s private sector was not in a strong enough position to naturally be able to boost investment into technological innovation. This would be a consequence of a lack of funders to provide the initial investment, putting off investors further down the line for larger investors so there is ‘a smaller pipeline of later-stage deals’. The suggested solution to this is a Green Investment Accelerator to fund projects at their early stages, similar to the Innovate UK Investment Accelerator for health, life sciences, and infrastructure systems.
This materialised in the £40 million Clean Growth Fund announced in May 2020 
; in the long-run this will allow for many more projects which will have made it to the later-stage investments, providing more opportunity for investors to finance revolutionary projects. The government has also created a sovereign green bond (on the recommendation of the Green Finance Team) 
called the Green Gilt, providing increased security through the backing of the government and therefore encouraging greater investment.
Governments around the world have provided financial incentives to stimulate investment into these green bonds through a tax credit, tax-exempt, and direct subsidy bonds.