Browser wars

From Wikipedia, the free encyclopedia

A timeline of web browsers

The most used web browser by country in 2020

A browser war is a competition for dominance in the usage share of web browsers. The "first browser war" (1995–2001) consisted of Internet Explorer and Netscape Navigator, and the "second browser war" (2004-2017) between Internet Explorer, Firefox, and Google Chrome.

With the introduction of HTML5 and CSS 3, a new generation of browser wars began, this time adding extensive client-side scripting to the World Wide Web (WWW), and the more widespread use of smartphones and other mobile devices for browsing the web. These changes have ensured that browser battles continue among enthusiasts, while the average web user is less affected.

Background

Usage share as of Q2 2009 by percent of layout engines/web browsers

Tim Berners-Lee along with his colleagues at CERN started the development of the WWW, an Internet-based hypertext system, in 1989. Their studies led to the creation of the HyperText Transfer Protocol, which would set the protocols for client-server communication. In 1990, he created the first web browser, WorldWideWeb, subsequently known as Nexus, and made it available for the NeXTstep Operating System, by NeXT.

Other browsers had started to surface by the end of 1992, many of which were based on the Libwww library. These included MacWWW/Samba for the Mac and Unix browsers including Line Mode Browser, ViolaWWW, Erwise, and MidasWWW. These browsers were HTML viewers that needed third-party helpers to display multimedia content.

Mosaic wars

In 1993, more browsers became available, including Cello, Lynx, tkWWW, and Mosaic. The most influential of these was Mosaic, a multi-platform browser developed at National Center for Supercomputing Applications (NCSA). By October 1994, Mosaic was "well on its way to becoming the world's standard interface", according to Gary Wolfe of Wired.

Several companies licensed Mosaic to create their commercial browsers, such as AirMosaic, Quarterdeck Mosaic, and Spyglass Mosaic. One of the Mosaic developers, Marc Andreessen, co-founded the Mosaic Communications Corporation and created a new web browser named Mosaic Netscape.

There are two ages of the Internet—before Mosaic, and after. The combination of Tim Berners-Lee's Web protocols, which provided connectivity, and Marc Andreesen's browser, which provided a great interface, proved explosive. In twenty-four months, the Web has gone from being unknown to absolutely ubiquitous.

— Mark Pesce, ZDNet

To resolve legal issues with NCSA, the company was renamed Netscape Communications Corporation, and the browser Netscape Navigator. The Netscape browser improved Mosaic's usability and reliability and was able to display pages as they loaded. By 1995, helped by the fact that it was free for non-commercial use, the browser dominated the emerging World Wide Web.

Other browsers launched during 1994 included IBM Web Explorer, Navipress, SlipKnot, MacWeb, and Browse.

While Netscape faced new competition from OmniWeb, Eolas WebRouser, UdiWWW, and Microsoft's Internet Explorer 1.0, it continued to dominate the market for 1995.

First browser war (1995–2001)

Market share for several browsers between 1995 and 2010.

By mid-1995, the World Wide Web had received a great deal of attention in popular culture and the mass media. Netscape Navigator was the most widely used web browser and Microsoft had licensed Mosaic to create Internet Explorer 1.0, which had released with Microsoft Windows 95 Plus! on August 24, 1995.

Unlike Netscape Navigator, Internet Explorer 1.0 was available to all Windows users free of charge, including commercial companies. Other companies later followed suit and released their browsers free of charge. Netscape Navigator and competitor products like InternetWorks, Quarterdeck Browser, InterAp, and WinTapestry were bundled with other applications to full Internet suites.

New versions of Internet Explorer (IE) and Netscape (branded as Netscape Communicator) were released often over the following few years. New features were routinely added, including Netscape's JavaScript (subsequently replicated by Microsoft as JScript) and proprietary HTML tags such as <blink> (Navigator) and <marquee> (Internet Explorer).

Internet Explorer 3 offered nearly identical services like its competitor, Netscape, offering scripting support and implemented the market's first commercial Cascading Style Sheets (CSS).

On September 22, 1997, Internet Explorer 4 was released. The release party in San Francisco featured a ten-foot-tall letter "e" logo. Netscape employees showing up to work the following morning found the logo on their front lawn, paired with greeting card signed "Best wishes, the IE team". The Netscape employees promptly knocked it over and set a giant figure of their Mozilla dinosaur mascot atop it, holding a sign reading "Netscape 72, Microsoft 18", referencing the companies' market share.

During these releases, it was common for web designers to display "best viewed in Netscape" or "best viewed in Internet Explorer" logos. These images often identified a specific browser and commonly linked to a source from which the stated browser could be downloaded. These logos generally recognized the divergence between the standards supported by the browsers and signified which browser was used for testing the pages. In response, supporters of the principle that websites should be compliant with World Wide Web Consortium standards and hence viewable with any browser started the "Viewable with Any Browser" campaign, which employed its logo similar to the partisan ones. Most mainstream websites, however, specified one of Netscape or Internet Explorer as their preferred browser while making some attempt to support minimal functionality on the other.

While Netscape had accrued about 75% of the market share within four months of its release, as a relatively small company deriving the great bulk of its income from what was essentially a single product (Navigator and its derivatives), it was financially vulnerable. Microsoft's resources allowed them to make Internet Explorer available without charge, as the revenues from Windows were used to fund its development and marketing. As a result, Internet Explorer was provided free for all Windows and Macintosh users, unlike Netscape, which was free for home and educational use but would require a paid license for business use.

Microsoft bundled Internet Explorer with every copy of Windows, which had over a 95% share of the desktop operating system market in June 2004, allowing the company to obtain market share more easily than Netscape as customers already had Internet Explorer installed as the default browser. At this time, many new computer purchasers had never extensively used a web browser before. Consequently, the buyer did not have anything else to compare with and little motivation to consider alternatives; any difference in browser features or ergonomics paled in comparison with the set of abilities they had gained with access to the Internet and the World Wide Web.

During the United States Microsoft antitrust case in 1998, Intel vice president Steven McGeady testified that a senior executive at Microsoft told him in 1995 of his company's intention to "cut off Netscape's air supply", although a Microsoft attorney rejected McGeady's testimony as not credible. That same year, Netscape was acquired by America Online for 4.2 billion dollars. Internet Explorer became the new dominant browser, attaining a peak of about 96% of the web browser usage share during 2001.

Second browser war (2004–2017)

Decline of Netscape

Mozilla Firefox 2.0.0.12 running on Ubuntu displaying Wikipedia

At the start of Netscape Navigator's decline, Netscape open-sourced its browser code and later entrusted it to the newly formed non-profit Mozilla Foundation — a primarily community-driven project to create a successor to Netscape. Development continued for several years with little widespread adoption until a stripped-down browser-only version of the full suite, which included new features such as a separate search bar (which had previously only appeared in the Opera browser), was created. The browser-only version was initially named Phoenix, but because of trademark issues that name was changed, first to Firebird, then to Firefox. Phoenix was chosen because "Phoenix", implied that it would rise like a phoenix after Netscape Navigator was killed off by Microsoft. This browser became the focus of the Mozilla Foundation's development efforts. Mozilla's Firefox 1 was released on November 9, 2004, and it then continued to gain an increasing share of the browser market until a peak of around 24% in 2010.

In response, in April 2004, the Mozilla Foundation and Opera Software joined efforts to develop new open-technology standards which add more capability while remaining backward-compatible with existing technologies. The result of this collaboration was the WHATWG, a working group devoted to the fast creation of new standard definitions that would be submitted to the W3C for approval.

The growing number of device/browser combinations in use, legally-mandated web accessibility, as well as the expansion of expected web functionality to essentially require DOM and scripting abilities, including AJAX, made web standards of increasing importance during this era. Instead of advertising their proprietary extensions, browser developers began to market their software based on how closely it adhered to standards.

On December 28, 2007, Netscape announced that support for its Mozilla-derived Netscape Navigator would be discontinued on February 1, 2008, suggesting its users migrate to Mozilla Firefox. However, on January 28, 2008, Netscape announced that support would be extended to March 1, 2008, and mentioned Flock alongside Firefox as alternatives to its users.

Internet Explorer

In 2003, Microsoft announced that Internet Explorer 6 Service Pack 1 would be the last standalone version of its browser. Future enhancements would be dependent on Windows Vista, which would include new tools such as the WPF and XAML to enable developers to build web applications.

On February 15, 2005, Microsoft announced that Internet Explorer 7 would be available for Windows XP SP2 and later versions of Windows by mid-2005. The announcement introduced the new version of the browser as a major upgrade over Internet Explorer 6 SP1.

Microsoft released Internet Explorer 7 on October 18, 2006. It included tabbed browsing, a search bar, a phishing filter, and improved support for web standards (including full support for PNG) — all features already long familiar to Opera and Firefox users. Microsoft distributed Internet Explorer 7 to genuine Windows users (WGA) as a high-priority update through Windows Update. Typical market share analysis showed only a slow uptake of Internet Explorer 7 and Microsoft decided to drop the requirement for WGA and made Internet Explorer 7 available to all Windows users in October 2007. Throughout the two following years, Microsoft worked on Internet Explorer 8. On December 19, 2007, the company announced that an internal build of that version had passed the Acid2 CSS test in "IE8 standards mode" — the last of the major browsers to do so. Internet Explorer 8 was released on March 19, 2009. New features included accelerators, improved privacy protection, a compatibility mode for pages designed for older browsers, and improved support for various web standards. It was the last version of Internet Explorer to be released for Windows XP. Internet Explorer 8 scored 20/100 in the Acid3 test, which was much worse than all major competitors at the time.

In October 2010, StatCounter reported that Internet Explorer had for the first time dropped below 50% market share to 49.87% in their figures. Also, StatCounter reported Internet Explorer 8's first drop in usage share in the same month.

Microsoft released Internet Explorer 9 on March 14, 2011. It featured a revamped interface, support for the basic SVG feature set, and partial HTML video support, among other new features. It dropped support for Windows XP, and only ran on Windows Vista, Windows 7, and Windows Phone 7. The company later released Internet Explorer 10 along with Windows 8 and Windows Phone 8 in 2012, and an update compatible with Windows 7 followed in 2013. This version dropped Vista and Phone 7 support. The release preview of Internet Explorer 11 was released on September 17, 2013. It supported the same desktops as its predecessor.

Starting in 2015 with the release of Windows 10, Microsoft shifted from Internet Explorer to Microsoft Edge (Commonly referred to as Edge). However, the new browser had failed to capture much popularity by 2018. Microsoft Edge switched from its own browser engine, EdgeHTML, to Chromium's Blink engine in 2020 for all platforms except for iOS, where it kept relying on WebKit due to platform restrictions.

Competing desktop and mobile browsers

Share of usage for top 7 used browsers between 2009 and 2021 according to StatCounter

Opera had been a long-time player in the browser wars, known for being lightweight and introducing innovative features such as tabbed browsing and mouse gestures. However, the software was commercial, which hampered its adoption compared to its free rivals until 2005, when the browser became freeware. On June 20, 2006, Opera Software released Opera 9 including an integrated source viewer, a BitTorrent client implementation, and widgets. It was the first Windows browser to pass the Acid2 test. Opera Mini, a mobile browser, has a significant mobile market share. Multiple ports, such as Opera 8.5 for the Nintendo DS and Opera 9 for the Wii, were also released.

On October 24, 2006, Mozilla released Mozilla Firefox 2. It included the ability to reopen recently closed tabs, a session restore feature to resume work where it had been left after a crash, a phishing filter, and a spell-checker for text fields. Mozilla released Firefox 3 on June 17, 2008, with performance improvements and other new features. Firefox 3.5 followed on June 30, 2009, with further performance improvements, native integration of audio and video, and more privacy features.

Apple created forks of the open-source KHTML and KJS layout and JavaScript engines from the KDE Konqueror browser in 2002. They explained that those provided a basis for easier development than other technologies by being small (fewer than 140,000 lines of code), cleanly designed, and standards-compliant. The resulting layout engine became known as WebKit and it was incorporated into the Safari browser that first shipped with Mac OS X v10.3. On June 13, 2003, Microsoft said it was discontinuing Internet Explorer on the Mac platform, and on June 6, 2007, Apple released a beta version of Safari for Microsoft Windows. On April 29, 2010, Steve Jobs wrote an open letter regarding his Thoughts on Flash, and the place it would hold on Apple's iOS devices and web browsers. Web developers were tasked with updating their web sites to be mobile-friendly, and while many disagreed with Steve Jobs's assessment on Adobe Flash, history would soon prove his point with the poor performance of Flash on Android devices. HTML4 and CSS2 were the standard in most browsers in 2006. However, new features being added to browsers from HTML5 and CSS3 specifications were quickly making their mark by 2010, especially in the emerging mobile browser market where new ways of animating and rendering for various screen sizes were to become the norm. Accessibility would also become a key player for the mobile web.

Google Chrome's entry

Google released the Chrome browser on September 1, 2008, using the same WebKit rendering engine as Safari and a faster JavaScript engine called V8. Shortly after, an open-sourced version for the Windows, Mac OS X, and Linux platforms was released under the name Chromium. According to Net Applications, Chrome had gained a 3.6% usage share by October 2009. After the release of the beta for Mac OS X and Linux, the market share had increased rapidly.

During December 2009 and January 2010, StatCounter reported that its statistics indicated that Firefox 3.5 was the most popular browser when counting individual browser versions, passing Internet Explorer 7 and 8 by a small margin. This was the first time a browser surpassed the Internet Explorer since the fall of Netscape Navigator. However, this feat, which GeekSmack called the "dethroning of Microsoft and its Internet Explorer 7 browser", could largely be attributed to the fact that it came at a time when version 8 was replacing version 7 as the dominant Internet Explorer version; no more than two months later Internet Explorer 8 had established itself as the most popular browser again. Other major statistics, such as Net Applications, never reported any other browser having a higher usage share than Internet Explorer if each version of each browser was looked at individually: for example, Firefox 3.5 was reported as the third most popular browser version from December 2009 to February 2010, succeeded by Firefox 3.6 since April 2010, each ahead of Internet Explorer 7 but behind Internet Explorer 6 and 8.

Google Chrome's dominance and evolving web standards

Usage share of web browsers according to StatCounter

Google Chrome, initially released in 2008, had a rapidly increasing trend in usage share since its creation, dominating the browser wars in 2017.

On January 21, 2010, Mozilla released Mozilla Firefox 3.6, which introduced a new type of theme display, 'Personas'. This allowed users to change Firefox's appearance with a single click. Version 3.6 also improved JavaScript performance, overall browser responsiveness, and startup times.

Google released Google Chrome 9 on February 3, 2011. New features introduced included support for WebGL, Chrome Instant, and the Chrome Web Store. The company created another seven versions of Chrome that year, finishing with Chrome 16 on December 15, 2011. Google Chrome 17 was released on February 15, 2012. In April 2012, Google browsers (Chrome and Android) became the most used browsers on Wikimedia Foundation sites. By May 21, 2012, StatCounter reported Chrome narrowly overtaking Internet Explorer as the most used browser in the world. However, the market share between Internet Explorer and Chrome meant that Internet Explorer was slightly ahead of Chrome on weekdays up until July 4. At the same time, Net Applications reported Internet Explorer firmly in first place, with Google Chrome almost overtaking Firefox as the second. In 2012, responding to Chrome's popularity, Apple discontinued Safari for Windows, making it exclusively available on OS X.

The concept of rapid releases established by Google Chrome prompted Mozilla to do the same for its Firefox browser. On June 21, 2011, Firefox 5.0 was the first rapid release for this browser, finished a mere six weeks after the previous edition. Mozilla created four more whole-number versions throughout the year, finishing with Firefox 9 on December 20, 2011. For those desiring long-term support, Mozilla made an Extended Support Release (ESR) version of Firefox 10 on January 31, 2012. Contrary to the regular version, a Firefox ESR received regular security updates plus occasional new features and performance updates for approximately one year, after which a 12-week grace period was given before discontinuing that version number. Those who continued to use the rapid releases with an active Internet connection were automatically updated to Firefox 11 on March 15, 2012. By the end of 2011, however, Chrome overtook Firefox to become the world's most used browser, and the competition between Chrome and Firefox intensified.

During this era, all major web browsers implemented support for HTML video. Supported codecs, however, varied from browser to browser. Then versions of Android, Chrome, and Firefox supported Theora, H.264, and the VP8 version of WebM. Older versions of Firefox omitted H.264 due to it being a proprietary codec, but it was made available beginning in version 17 for Android and version 20 for Windows. Internet Explorer and Safari supported H.264 exclusively on March 14, 2011 with Internet Explorer 9, and on March 18, 2008 with Safari 3.1. However, Theora and VP8 codecs could be manually installed on the desktop versions. Given the popularity of WebKit for mobile browsers, Opera Software discontinued its Presto engine upon the release of Opera 15 on July 2, 2013. The Opera 12 series of browsers were the last to use Presto with its successors using WebKit instead. In 2015, Microsoft discontinued the production of newer versions of Internet Explorer. By this point, Chrome overtook all other browsers as the browser with the highest usage share.^[69][70] Chrome had supported Windows XP until the end of 2015.

By 2017 usage shares of Opera, Firefox and Internet Explorer fell well below 5% each, while Google Chrome had expanded to over 60% worldwide. On May 25, 2017, Andreas Gal, former Mozilla CTO, publicly announced that Google Chrome won the Second Browser War.

Beyond the browser wars

Due to Google Chrome's success, in December 2018, Microsoft announced that they would be building a new version of Edge based on Chromium and powered by Google's rendering engine, Blink, rather than their own rendering engine, EdgeHTML. The new Microsoft Edge browser was released on January 15, 2020. Though Firefox showed a slight increase in usage share as of February 2019, it continues to struggle with less than 10% usage share worldwide.^[76] By April 2019, worldwide Google Chrome usage share crossed 70% across personal computers and remained over 60% combining all devices. In June 2022, Microsoft permanently retired Internet Explorer in favor of Microsoft Edge as their sole browser. As of January 2023, Microsoft Edge was the 3rd most used web browser having 4.46% as market share. In 2023, Internet Explorer was permanently disabled by Microsoft on many versions of Windows 10.

As of 2023, Microsoft Edge has been noted to promote itself when visiting or searching for Google Chrome. Ignoring user settings, links from Windows integrated features, such as widgets, open in Edge.

In February 2024, Microsoft silently released the User Choice Protection Driver for Windows 10 and 11 that prevent software changes to the default Browser, requiring users make the changes only through Windows settings.  In May 2024, a Chrome extension by Microsoft maintains Bing as the default search engine.

Social impact bond

From Wikipedia, the free encyclopedia
https://en.wikipedia.org/wiki/Social_impact_bond

SIB functioning process diagram

A social impact bond (SIB), also known as pay-for-success financing, pay-for-success bond (US), social benefit bond (Australia), pay-for-benefit bond (Australia), social outcomes contract (UK), social impact partnership (Europe), social impact contract (Europe), or simply a social bond, is a form of outcomes-based contracting. Although there is no single agreed definition of social impact bonds, most definitions understand them as a partnership aimed at improving the social outcomes for a specific group of citizens. The term was originally coined by Geoff Mulgan, chief executive of the Young Foundation. The first SIB was launched by UK-based Social Finance Ltd. in September 2010.

By July 2019, 132 SIBs had been launched in 25 countries, and they were worth more than $420m. As of May 2023, 23 countries use SIBs, with (as of 2022) 276 projects in place and capital raised to the value of $745m.

History

The social impact bond is a non-tradeable version of social policy bonds, first conceived by Ronnie Horesh, a New Zealand economist, in 1988. Since then, the idea of the social impact bond has been promoted and developed by a number of agencies and individuals in an attempt to address the paradox that investing in prevention of social and health problems saves the public sector money, but that it is currently difficult for public bodies to find the funds and incentives to do so.

The first social impact bond was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation program. In the UK, the Prime Minister's Council on Social Action (a group of ‘innovators from every sector’ brought together to ‘generate ideas and initiatives through which Government and other key stakeholders can catalyse, celebrate and develop social action’) was asked in 2007 to explore alternative models for financing social action. The group began to develop the idea of a social impact bond, and the work is being taken forward by a number of organisations including Social Finance, an organisation committed to increasing investment in the third sector, the Young Foundation, the Center for Social Impact in Australia, and other NGOs and private firms. In the UK, the Government Outcomes Lab was set up through a partnership between the UK government and the University of Oxford to investigate evidence around the use of social impact bonds and outcomes-based contracting approaches more broadly.

The idea of a social impact bond has generated significant interest from across the political spectrum in multiple countries, including US, UK, and Australia. Social impact bonds have generated a particularly large amount of interest in the United States. In February 2011, Barack Obama’s proposed 2012 budget stated that up to $100m would be freed up to run social impact bond pilot schemes. In August, 2012, Massachusetts became the first US state to create a policy which encourages the creation of Social impact bonds, called "Social innovation financing". The state legislature authorised spending up to $50 million on the initiatives. In Australia, the intention to trial social impact bonds was announced in New South Wales in November 2010 by Premier Kristina Keneally of the Australian Labor Party. The policy direction was continued by the Coalition after a change in Government in 2011.

In November 2012, Essex County Council became the first local authority in the UK to commission a social impact bond in Children's Services, with the aim of providing therapeutic support and improving outcomes for adolescents at risk of going into care. Nick Hurd, the minister for civil society, commented: "Social impact bonds are opening up serious resources to tackle social problems in new and innovative ways. This is about communities, businesses and charities all working together to change people's lives, whilst at the same time making savings for the taxpayer."

In February 2013 Allia, a charitable social investment organisation, announced the first public opportunity in the UK to invest in a social impact bond. Although the product was later withdrawn from sale due to lack of investors, the Future for Children Bond combined a relatively low-risk ethical investment into affordable housing to provide the funds to repay capital to investors, with a higher risk investment into a social impact bond with the aim of delivering a high social impact and providing an additional variable return. It would have invested into the social impact bond for Essex County Council to ‘improve the life outcomes’ of children aged 11–16 at risk of going into care.

In July 2016, the Social Finance Global Network launched a white paper on the state of the SIB market, "Social Impact Bonds: The Early Years". Social Finance also released a live global database of SIBs. The database can be sorted by country, issue area, investor, payor and service provider, providing a comprehensive overview of SIBs launched to date and a snapshot of the many in development.

Definitions

SIBs as partnerships: partners and responsibilities

There are a range of interpretations of what the term ‘social impact bond’ means. Broadly speaking, social impact bonds are a type of bond, but not the most common type. While they operate over a fixed period of time, they do not offer a fixed rate of return. Repayment to investors is contingent upon specified social outcomes being achieved. Therefore, in terms of investment risk, social impact bonds are more similar to that of a structured product or an equity investment. Third Sector Capital Partners describes social impact bonds as “a potential financing option available to support pay-for-success programs. Social impact bonds bring together government, service providers and investors/funders to implement existing and proven programs designed to accomplish clearly defined outcomes. Investors/funders provide the initial capital support and the government agrees to make payments to the program only when outcomes are achieved. So government pays for success.”

Social Finance UK describes social impact bonds as: “a social impact bond is a public-private partnership which funds effective social services through a performance-based contract.” Social Finance, therefore, specifies that the investment is from non-government bodies.

The Young Foundation describes social impact bonds as: “a range of financial assets that entail raising money from third parties and making repayments according to the social impacts achieved.” The Young Foundation envisages that public bodies could be potential investors.

The Non-Profit Finance Fund describes social impact bonds as: “PFS financing agreements, in which private investors provide upfront capital for the delivery of services and are repaid by a back-end, or outcomes payor (usually a government), if contractually agreed-upon outcomes are achieved, are often referred to as ‘Social Impact Bonds’ ... Social Impact Bonds (SIBs) are a mechanism by which to shift financial risk from service providers to investors, with investors underwriting service providers’ based on their ability to deliver on positive social outcomes.”

The Government Outcomes Lab identifies four main dimensions along which SIBs might vary: “the nature and outcome of payment outcomes”, “the nature of capital used to fund services”, “the strength of performance management”, and “the social intent of service providers”. According to the GO Lab, a 'core' SIB is therefore defined by “100% payment on outcomes”, “independent and at-risk capital”, “a high degree of performance management”, and “a strong social intent of service providers”.

In developing countries, a development impact bond (DIB) is a variation of the SIB model. DIBs are outcomes-based funding structures for the delivery of public services in low- and middle-income countries. As with SIBs, investors would provide external financing and only receive a return if pre-agreed outcomes are achieved. Funds to remunerate investors come from donors, the budget of the host country, or a combination of the two. Financial returns to investors are intended to be commensurate with the level of success. DIBs have the potential to improve aid efficiency and cost-effectiveness by shifting the focus onto implementation quality and the delivery of successful results. In October 2013, Social Finance Ltd. and the Center for Global Development released a report outlining the findings of a high level working group set up to explore the potential of this new mechanism.

Arguments in favour

Social impact bonds being a new program, the hypothetical benefits projected by its advocates have not been measured or verified yet. Advocates of these performance-based investments claim that they encourage innovation and tackle difficult social problems, asserting that new and innovative programs have potential for success, but often have trouble securing government funding because it can be hard to rigorously prove their effectiveness. This form of financing allows the government to partner with private service providers and, if necessary, private foundations or other investors willing to cover the upfront costs and assume performance risk to expand promising programs, while assuring that taxpayers will not pay for the programs unless they demonstrate success in achieving the desired outcomes. The expected public sector savings are used as a basis for raising investment for prevention and early intervention services that improve social outcomes. Advocated also believe that SIB programs can achieve positive social outcomes, may create fiscal savings for government, but also involve changes in funding arrangements that bring risks to service agencies.

The benefits of social impact bonds depends on the definition being used, but the broad benefits (though not measured and verified yet) are:

• Prevention — more funds are available for prevention and early upstream intervention services.
• Risk transfer — the public sector only has to pay for effective services; the third party investor bears all the risk of services being potentially ineffective.
• Innovation — risk transfer enables innovation since investors and service providers have an incentive to be as effective as possible, because the larger impact they have on the outcome, the larger the repayment they will receive.
• Performance management — the SIB approach imbeds vigorous ongoing evaluation of program impacts into program operations, accelerating the rate of learning about which approaches work and which do not. Governments will therefore fund "what works"; repositioning government spending to cost-effective preventive programs. Additionally, independent evaluation creates transparency for all parties.
• Collaboration — enable collaboration across multiple commissioners and within service provider networks and attract new forms of capital to the social, educational and healthcare sectors.

Criticism

Critics note that because the outcomes-based payments are dependent on governmental funds which must be budgeted, social impact bonds do not actually raise additional capital for social programs, but instead displace funding for other programs. Given the need to budget for a return on investment, a program evaluation, middle managers, and the expenses of designing the complex financial and contractual mechanisms, social impact bonds, according to critics, may be an expensive method of operating social programs. Other criticisms include:

• Criteria for success — donors will seek to fund that which can be observed and measured, the outcomes (not just the outputs). This will leave agencies addressing the huge structural problems in society unable to access these funds. This is going to be particularly true for advocacy, arts and alternative organizations. It will be difficult for social coalitions to get funding as their contributions are dispersed through member organizations and the effect they have on government policies, for example. The terms of these instruments may be set to overpay for more readily achievable goals. Doing so would increase long term government spending and divorce such spending from direct deliverables.
• More donor influence — donors, or now investors, will want to make sure their money is being used according to contract, and will therefore want to be more involved in the delivery of social services. They may want NGOs to adopt a style of delivery used in for profit business.
• Unfair competition — among NGOs will emerge. Agencies that secure funds will be able to operate in areas where NGOs now operate, but they will have greater resources, more narrowly defined goals (and therefore successes to publicize) and will set the standard for government funded agencies and their actions.
• Reduces public responsibility — by reducing the government's responsibilities and accountability for delivering services. Though governments may not genuinely represent their societies, they are still the best representatives of the public will and governments play an important role in maintaining a civil society sector. Devolving Social services to businesses risks this social contract when other tax and program options can be made available.
• Non-tradability — New Zealand economist Ronnie Horesh argues that because SIBs are not tradable, SIBs favour existing institutions, are inherently narrow and short-term in scope, and impose relatively high monitoring costs.
• Not required — Social Programs targeted to be transferred into social impact bonds are targeted because they are compatible with the SIB structure, not because of the merits of SIB or out of dire need.
• Financialization of public services — social impact bonds require a clear measurement of the costs and outcomes of the programs, which encourages SIB projects to "focus on financial targets rather than eliminating the underlying cause of the social problem at hand".

Existing SIB initiatives

Governments across the world are currently piloting SIB initiatives. Below are a few examples of these initiatives.

Public safety and recidivism

United Kingdom

On 18 March 2010, Secretary of State for Justice Jack Straw announced a six-year Social Impact Bond (SIB) pilot scheme run by Social Finance that will see around 3,000 short term prisoners from Peterborough prison, serving less than 12 months, receiving intensive interventions both in prison and in the community. Funding from investors outside government will be initially used to pay for the services, which will be delivered by Third Sector providers with a proven track record of working with offenders. If reoffending is not reduced by at least 7.5% the investors will receive no recompense. The Social Impact Bond in Peterborough was launched by Secretary of State for Justice Kenneth Clarke MP and Prisons Minister Crispin Blunt on 10 September 2010.

United States

New York City: In February 2012, the City of New York issued a $9.6 million social bond for prisoner rehabilitation to be run by The Osborne Association with support from Friends of Island Academy. Goldman Sachs bought the bond and will profit if recidivism decreases. While the City of New York did not actually issue bonds or put up-front capital for MDRC to run the program (this was done by Goldman Sachs directly with MDRC), the City may be liable for some amount if the program is successful. An independent evaluation, performed by the Vera Institute of Justice, found the goal of reducing teenage recidivism by ten percent had not been met, at all, and the city paid nothing to Goldman Sachs.

New York State: In mid-2012, the New York State Department of Labor (DOL) selected Social Finance US as its intermediary partner in structuring an application for federal funding for a Social Impact Bond. In 2013, New York approved $30 million in its budget to support social impact bonds over the subsequent five years. In September 2013, New York State received a $12 million grant from the United States Department of Labor (USDOL) to fund a Pay for Success project designed to increase employment and reduce recidivism among 2,000 formerly incarcerated individuals in partnership with Social Finance US and the Center for Employment Opportunities. This was the largest grant awarded by USDOL for Pay for Success projects. Initial outcomes indicate that, at least in the first phase of these PFS projects, the interventions did not produce the desired impacts on reducing recidivism and improving employment among the target populations.

Massachusetts: On 1 August 2012, the Commonwealth of Massachusetts announced that Third Sector Capital Partners will serve as lead intermediary, in partnership with New Profit Inc., for the youth recidivism initiative. Roca, United Way of Massachusetts Bay and Merrimack Valley, and Youth Options Unlimited will also participate in the youth recidivism project.The program, called Social Innovation Financing, operates on a simple "pay for success" model, in which nonprofits must demonstrate that by keeping youth from being reincarcerated. According to the state's press release, the juvenile justice contract "will be designed with the specific goal of reducing recidivism and improving education and employment outcomes over several years for a significant segment of the more than 750 youth who exit the juvenile justice system, and the several thousand who exit the probation system annually."

Federal: The U.S. Department of Justice gave "Priority Consideration" to Fiscal Year 2012 Second Chance Act grant applications that include a Pay for Success component. The Second Chance Act (P.L. 110-199) authorizes federal grants to support services that help reduce recidivism. In 2013, the U.S. Department of Labor awarded nearly $24 million in grants for Pay for Success projects that provide employment services to formerly-incarcerated individuals in order to increase employment and reduce recidivism.

Australia

The Government of New South Wales, Australia, announced on 20 March 2012 that it will develop a pilot to reduce adult recidivism with Social Ventures Australia and Mission Australia. Several States in Australia have now launched social impact bonds - the latest of which is Victoria which, on 21 December 2017, announced the conclusion of a SIB deal with Sacred Heart Mission. Key external advisers to Sacred Heart Mission were Latitude Network. Also in 2017, Social Ventures Australia funded the Aspire Social Impact Bond, marking the first SIB in South Australia.

Rough sleeping and chronic homelessness

United Kingdom

Housing Minister Grant Shapps and London Mayor Boris Johnson announced in March 2012 that a Social Impact Bond would be launched to help London's persistent rough sleepers off the streets and into secure homes. The two bonds issued under this programme were launched in December 2012.

One successful SIB in the UK is the GM Homes Partnership in Manchester which took on 356 long-term rough sleepers. According to The Guardian, three years on, in 2021, 79% of those are still accommodated with several having started employment or training and other receiving help for their mental health.

United States

Massachusetts: In the second of two pilots launched by Massachusetts in 2012, Third Sector Capital Partners joined with the Massachusetts Housing and Shelter Alliance (MHSA), lead intermediary for a chronic homelessness project, as well as the Corporation for Supportive Housing and United Way. The Massachusetts Housing and Shelter Alliance represents nonprofit housing organizations that provide housing and support services, such as medical care and vocational training. The consortium' goal was to raise the number of housing units it provides to around 600 from 220.

Australia

Australia's second Social Impact Bond focused on chronic homelessness was launched on 21 December 2017 by the Victorian Minister for Housing, Disability and Ageing. The SIB will be focused on three cohorts of 60 individuals, providing rapid housing and wrap-around, individualised, case-management support for three years each. The SIB provides expansion capital for Sacred Heart Mission's 'Journey to Social Inclusion' program which had previously been through pilot testing. Lead external advisors for this SIB deal were Latitude Network.

Health

United States

Fresno, CA: In April 2013 Social Finance US and Collective Health launched an asthma management demonstration project in Fresno, California. Fresno is one of the nation's asthma hot spots; around 20 percent of its children have been diagnosed with the disease, which takes an especially heavy toll among poor communities. Two service providers, Central California Asthma Collaborative and Clinica Sierra Vista, will work with the families of 200 low-income children with asthma to provide home care, education, and support in reducing environmental triggers ranging from cigarette smoke to dust mites.

Communities

United Kingdom

The chief secretary to the Treasury, Liam Byrne, announced that Social Impact Bond trials could be expanded across government departments. "The Department for Children, Schools and Families have pledged to explore the potential of SIBs to lever in additional resources to support early intervention approaches with children and young people", he said in Parliament. "Communities and Local Government are also working with Leeds City Council and NHS Leeds to enable them to use a SIB approach to reduce health and social care costs among older people. Similarly Bradford Metropolitan District Council are considering applying this model as part of their involvement in the government's Total Place programme."

United States

Federal: The U.S. Department of Housing and Urban Development (HUD) announced in 2013 it will provide $5 billion in grant dollars to assist in the rebuilding and strengthening effort following Hurricane Sandy and encouraged the five states impacted by the storm to make use of Pay for Success strategies where appropriate. In 2013, the Department of the Treasury issued a Request for Information (RFI) that will help design a proposed $300 million Incentive Fund to further expand Pay for Success. The Fund is intended to encourage cities, states and nonprofits to test new Pay for Success models. This same Fund was also part of the President's commitment of nearly $500 million in the 2013 Budget to expand Pay for Success strategies.

Children and families

United Kingdom

Social Finance worked with UK local authorities to assess the potential for social impact bonds to improve family support services. These studies assessed the potential of social impact bonds to fund preventive and early intervention services which improve outcomes for children and generate cost savings for Local Authorities.

In March 2012 Manchester City Council announced a social impact bond to fund multi-dimensional treatment foster care.

Australia

New South Wales: The Government of New South Wales, Australia, announced on 20 March 2012 that it will develop three pilots in the area of child protection, foster care and juvenile justice. One of the child protection pilots is with a consortium involving the Benevolent Society, Westpac Bank and the Commonwealth Bank of Australia. The other child protection pilot is led by UnitingCare Burnside, a division of UnitingCare Australia. The juvenile justice pilot to be delivered by Mission Australia did not go ahead.

United States

Utah: In August 2013, the Goldman Sachs Urban Investment Group (UIG) together with the United Way of Salt Lake and J.B. Pritzker formed a partnership to create the first ever Social Impact Bond designed to finance early childhood. Goldman Sachs and Pritzker jointly committed up to $7 million to finance The Utah High Quality Preschool Program, a high impact and targeted curriculum focused on increasing school readiness and academic performance among at-risk 3 and 4 year olds in Utah.

Illinois: On 5 May 2014, the State of Illinois announced the state's first Pay for Success (PFS) contract will increase support for at-risk youth who are involved in both the child welfare and juvenile justice systems in Illinois. The first contract awarded under this innovative initiative will go to One Hope United, in partnership with the Conscience Community Network (CCN).

Canada

Saskatchewan:

"[In 2014], Saskatchewan announced its first SIB, a $1 million project to provide assisted living to young single mothers at risk in Saskatoon, designed to reduce the number of children taken into care. [...] This is a five year project which will return the original investment and a 5% return to the funders if 22 children remain with their mothers for six months after leaving the Sweet Dreams assisted living home. The return will be pro-rated if 17 to 21 children stay with their mothers and nothing, neither the original investment nor the return, will be paid if fewer than 17 children remain with their mothers."

Early stage exploration

United States

States across the country are currently exploring opportunities to use social impact bonds to achieve their social goals, including:

• California: In August 2013, Santa Barbara County released a Request for Information on social impact bonds and approved a feasibility study to explore the potential use of pay for success financing in reducing prisoner recidivism; additionally, Santa Clara agreed to fund a pilot project exploring SIB feasibility. By 2015, Santa Clara County had implemented an SIB known as Project Welcome Home, administered by a local non-profit and focused on housing the highest-need homeless people over six years.
• Colorado: In June 2013, Colorado and Denver were selected to receive support from a Harvard Kennedy School SIB Technical Assistance Lab (SIB Lab) fellow. Both jurisdictions have released a "Request for Information" (RFI) on SIBS. Denver's was implemented by February 2016. This, like Santa Clara's, focused on reducing chronic homelessness and the negative social phenomena associated therewith.
• Connecticut: In 2013, the Department of Children and Families released a Request for Information to explore how social impact bonds might be used to address substance abuse among families involved in the child welfare system.
• Illinois: In April 2013, Governor Quinn announced that the State would pursue a Social Impact Bond program with technical support from the Harvard SIB Lab. In September, Illinois issued a "Request for Proposal" (RFP), focused on youth engaged in the juvenile justice and/or foster care systems.
• Maryland: In 2013, Social Impact Bond legislation was introduced to the Committee on Appropriations in the Maryland House of Delegates.
• Michigan: In September 2013, Michigan was selected to receive support from the SIB Lab to develop pay for success programs funded by social impact bonds. The state initiated an RFI to obtain initial input about potential projects.
• New Jersey: In December 2012, the State Assembly Commerce and Economic Development Committee approved the New Jersey Social Innovation Act, which would establish a five-year pilot program to attract private funding to finance social services. The target areas are prevention and early intervention health care for low-income and uninsured people, in order to reduce government health care spending.
• North Carolina: In 2013, the Center for Child and Family Policy at Duke University began exploratory work around using SIBS for dissemination of a universal home visiting program known as Durham Connects found to reduce emergency care in infants.
• Ohio: In November 2012, Cuyahoga County released an RFP on funding social service programs through pay-for-success contracts. In the summer of 2013, the state of Ohio was selected to receive assistance from the SIB Lab.
• Oregon: The Governor's 2013-2015 budget proposal included $800,000 for the Early Learning Division. The funds are intended to cover start-up costs for a "Pilot Prevention Health and Wellness Demonstration Project for Social Impact Financing."
• South Carolina: In June 2013, South Carolina was selected to receive assistance from the SIB Lab and looks to use the support to develop a home-visiting program. In September 2012, the state issued an RFI related to Social impact bonds.
• Washington, D.C.: The District of Columbia initiated a Request for Qualifications in September 2013 for a feasibility study of DC Social impact bonds.

Canada

• In 2014, the government of Alberta created the Social Innovation Endowment Account to "fund the promotion and development of social impact bonds in Alberta".
• The government of Ontario included Social Impact Bonds in the list of innovative social financial tools to be explored as of 2016.

Mexico

• "El Futuro en Mis Manos" was piloted in 2016 in the Guadalajara metropolitan area and, over 30 months, provided support to more than 1300 female-headed households.

Education

Russia

• Yakutia: During the St. Petersburg International Economic Forum in June 2019, VEB.RF, the Far East Development Fund, Higher School of Economics and the Government of the Sakha (Yakutia) Republic formally agreed to carry out the first pilot SIB in the Republic of Sakha (Yakutia). The project is scheduled for implementation in 2019–2022 and designed to improve schoolchildren's academic performance. The project aims to improve the quality of general education, make human resources more competitive and transform the management mechanism of general education. About 5,000 children from 28 schools (including eight underfilled and three small-scale establishments) in the Khangalassky Municipal District are involved in the project. The project's social outcomes are measured using an educational performance index calculated as a weighted total of grades in the State Final Examinations (Basic State Examination and Unified State Examination) and academic competitions. Higher School of Economics was selected to implement the project. During three years, HSE leading experts will give the schoolchildren additional lessons (including under a distance learning programme), assist the schools in preparing personal education plans, train project managers and teachers, help the schools to organise professional communities, partnerships and educational networks, act as mentors for teachers and principals, and engage parents, the local community and businesses. The project should have a sustainable model, enabling local teachers and managers to develop their own education systems on completion of the project. The project should be able to be extended to other Russian regions. “The Far East and Baikal Region Development Fund is the project’s investor. This project is important to us, because if we achieve positive social outcomes, the project’s approaches and methods can be implemented across the Republic of Sakha (Yakutia) and in other Far Eastern regions,” CEO of the Far East and Baikal Region Development Fund Alexei Chekunkov said. The Russian Ministry of Finance drafted a Government resolution with guidelines for the regions on the implementation of pilot social impact projects in 2019–2024 in order to promote pay-for-success financing for social outcomes.

International Development Assistance

United Nations Development Programme and EBRD pilot social impact bond in Armenia with the focus on improving the lives of smallholder farmers in the Shirak region, Slovak Republic (Ministry of finance) provided funding for the donor study.

Intermediaries and technical assistance providers

A list of over 20 intermediaries and providers of technical assistance in the UK is maintained as part of the Big Lottery Fund's Commissioning Better Outcomes programme.

Publications

Social Finance UK (2009) Social Impact Bonds: Rethinking finance for social outcomes

Social Finance UK (2010) Towards a New Social Economy: Blended value creation through Social Impacts Bonds

Young Foundation (2010) Social Impact Investment: the challenge and opportunity of Social Impact Bonds

Social Finance UK (2011) A Technical Guide to Developing Social Impact Bonds

Centre for American Progress (2011) Social Impact Bonds

Impact Economy (2011) Four Revolutions in Global Philanthropy

Social Finance (2011) Technical Guide to Commissioning Social Impact Bonds

Social Finance (2011) Social Impact Bonds: The One Service, One Year On

Rand Corporation (2011) Lessons learned from the planning and early implementation of the Social Impact Bond at HMP Peterborough, RAND Europe, 2011

Social Finance US (2012) A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital to Advance Social Good

Benjamin R. Cox (2012) Financing Homelessness Prevention Programs with Social Impact Bonds

Maryland Department of Legislative Services (2013) Evaluating Social Impact Bonds as a New Reentry Financing Mechanism: A Case Study on Reentry Programming in Maryland. 

Third Sector Capital Partners (2013) Case Study: Preparing for a Pay for Success Opportunity

Social Market Foundation (2013) Risky Business: Social Impact Bonds and public services

The New Zealand Initiative (2015) Investing for Success: Social Impact Bonds and the future of public services

Government Outcomes Lab (2018) Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation.

Government Outcomes Lab (2018) Are we rallying together? Collaboration and public sector reform.

Green bond

From Wikipedia, the free encyclopedia

A Green bond (also known as climate bond) is a fixed-income financial instruments (bond) which is used to fund projects that have positive environmental and/or climate benefits. They follow the Green Bond Principles stated by the International Capital Market Association (ICMA), and the proceeds from the issuance of which are to be used for the pre-specified types of projects.

Like normal bonds, climate bonds can be issued by governments, multi-national banks or corporations and the issuing organization repays the bond and any interest. The main difference is that the funds will be used only for positive climate change or environmental projects. This allows investors to target their environmental, social, and corporate governance (ESG) goals by investing in them. They are similar to Sustainability Bonds but sustainability bonds also need to have a positive social outcome.

History

Climate bonds were first proposed in the 2000s, and have grown rapidly since then. As of 2016, the total volume of climate bonds was estimated at 160 billions of dollars; of which 70 billions were issued in 2016. The labelled volume of bonds issued in 2019 was US$255 billion. Climate and green bonds have now been issued by thousands of issuers around the world, including sovereigns, banks and companies of all sizes, and local governments.

Voters in the City of San Francisco approved a revenue bond authority in 2001, in the form of a city charter amendment (Section 9.107.8) known as the "solar bonds," to finance renewable energy and energy conservation measures on homes, businesses and government buildings. The campaign for solar bonds, Proposition H, was motivated by the need for the city to take meaningful action on climate change. The solar bond authority was being used as part of the city's renewable energy program, administered by the San Francisco Public Utilities Commission, CleanPowerSF.

The European Investment Bank issued an equity index-linked bond in 2007, which became the first fixed income product among socially responsible investments. This "Climate Awareness Bond" structure was used to fund renewable energy and energy efficiency projects. Afterwards, The World Bank became first in the world to issue a labelled "green bond" in 2008, which followed a conventional "plain vanilla" bond structure, contrary to the European Investment Bank's equity-linked Climate Awareness Bond.

The green bond market has subsequently increased rapidly in issuance. From 2015 to 2016, the Climate Bonds Initiative reports that there was a 92% increase in green bonds issuance to $92 billion, with different types of issuers starting to issue green bonds. Apple, for example, became the first tech company to issue a green bond in 2016, and Poland became the first sovereign country to issue a green bond at the end of 2016. In 2021, the European Investment Bank was the leading issuer of green and sustainability bonds among multilateral development banks, with sustainability funding reaching €11.5 billion equivalent.

As of at least 2017, China held the largest share (23%) of the green bond market.

In 2020, the UK's first ever local government green bond, for West Berkshire Council, closed after reaching its £1mn target five days early. Announced on Wednesday 14 October 2020, 22% of the funds raised came from West Berkshire residents, who invested an average of £3,500. The Community Municipal Investment attracted 640 investors in total. In September 2021, the UK's inaugural "green gilt" sale drew over £100bn from investors, making it the highest ever for a UK government bond sale.

In Canada, The Community Bond, an innovation in social finance that allows benevolent organizations to issues bonds outside of traditional regulatory oversight, is being used as a "Green Bond" by environmental groups like Solarshare to build community owned solar farms, ZooShare to finance a biogas plant, and Hallbar.org as means to finance energy saving home upgrades and LEED certified building construction.

In 2022, the European Investment Bank issued EUR 19.9 billion in Climate and Sustainability Awareness Bonds, and increased its climate and sustainability funding portion of overall investment from 21% in 2021 to 45% in 2022. On 21 December 2024, the European Union Green Bonds Regulation comes into force, allowing the issue of "European Green Bond" (or "EuGB") by companies, regional or local authorities and EEA supra-nationals.

Description

Climate bonds are issued in order to raise finance for climate change solutions: climate change mitigation or adaptation related projects or programs. These might be greenhouse gas emission reduction projects ranging from clean energy to energy efficiency, or climate change adaptation projects ranging from building Nile delta flood defences or helping the Great Barrier Reef adapt to warming waters.

Like normal bonds, climate bonds can be issued by governments, multi-national banks or corporations. The issuing entity guarantees to repay the bond over a certain period of time, plus either a fixed or variable rate of return.

Most climate bonds are asset-backed, or ringfenced, with investors being promised that all funds raised will only go to specified climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs.

In their UNEP paper on investors and climate change, Mackenzie and Ascui differentiate a climate bond from a green bond: "(A climate bond is) an extension of the green bond concept. Green bonds are issued [...] in order to raise the finance for an environmental project. Climate bonds [are] issued [...] to raise finance for investments in emission reduction or climate change adaptation."

The London-based Climate Bonds Initiative provides the world's first Certification program for climate bonds. This has been used as a model for various countries to set up their own green bond listing guidelines.

Climate bonds are theme bonds, similar in principle to a railway bond of the 19th century, the war bonds of the early 20th century or the highway bond of the 1960s. Theme bonds are designed to:

• Allow institutional capital - pension, government, insurance and sovereign wealth funds - to invest in areas seen as politically important to their stakeholders that have the same credit risk and returns profile as standards bonds.
• Provide a means for governments to direct funding to climate change mitigation. For example, this might be done by choosing to privilege qualifying bonds with preferential tax treatments.
• Send a political signal to other stakeholders.

Otherwise, for operational purposes, theme bonds largely function as conventional debt instruments. They are risk-weighted and credit rated in the usual way based on the creditworthiness of the issuer, and tradable, market conditions permitting, in international secondary bond markets. These instruments can theoretically be issued at all levels of the fixed income market, from sovereigns to corporate.

Benefits of green bonds

The growth of bond markets provides increasing opportunities to finance the implementation of the Sustainable Development Goals, Nationally Determined Contributions and other green growth projects. A UN conference held on the Sustainable Development Goals in 2021 emphasized the importance of sustainable bonds, and stated that of the approximately €300 trillion of financial assets on the markets, only 1% would be needed to achieve the SDGs. Green bonds are becoming an increasingly prevalent form of green finance, particularly for clean and sustainable infrastructure development and their large funding needs. They offer a vehicle to both access finance from the capital markets and deliver green impacts that can be verified against standards. In developing countries, green bonds are already financing critical projects, including renewable energy, urban mass transit systems and water distribution.

Green bonds mobilised over $93 billion in 2016 to projects and assets with positive environmental impacts.

Of total global bond issuance, however, this is still around just 1%.

According to a report by the Climate and Development Knowledge Network and PricewaterhouseCoopers, a green bond market has three key benefits to a country and its environmental goals and commitments.

• It increases the finance available for green projects, therefore incentivising an increase in their number. Today, green bonds mainly finance projects within renewable energy, energy efficiency, low-carbon transport, sustainable water, and waste and pollution.
• It is a viable vehicle for enabling the increasing pool of sustainable investors to access environmental projects. Bonds are an instrument and an approach with which foreign investors are familiar, so these institutions need little new understanding or capacity. Investors are also interested in placing money where the environmental impact achieved is highest per unit of currency, and emerging and developing economies have the potential to offer this where lower project costs exist.
• It can be a catalyst for further development of the domestic capital market and financial system more broadly beyond environmentally related projects.

Demand for green bonds

The Business and Sustainable Development Commission describes at least US$12 trillion in market opportunities for business from sustainable business models.

The United Nations estimates an annual funding gap of $2.5 trillion is needed for the achievement of the Sustainable Development Goals (SDGs), and of this, US$1 trillion is needed annually for clean energy alone. A large number and broad range of projects and assets that contribute to achieving the 17 SDGs need this funding for their development and operations.

One of the SDGs where 'green finance' has been successfully mobilised is on clean energy and climate action. The Paris Agreement on climate change entered into force in November 2016, after 196 countries committed to reducing greenhouse gas emissions. Significant quantities of finance are now needed to convert country commitments (Nationally Determined Contributions, NDCs) to implementation and a low-carbon, climate-resilient economy.

Despite recent increases in volumes of climate finance, a significant funding gap will arise unless new sources and channels of finance are mobilised.

Existing international public finance dedicated to climate change is unable to achieve the rapid change required in meeting the finance gap alone. Furthermore, public sector balance sheets do not have the capacity to fund the amounts needed, and so an estimated 80–90% of funding will need to come from the private sector.

Bank balance sheets can take only a proportion of the private finance needed so the capital markets have to be leveraged, along with other sources such as insurance and peer-to-peer.

According to Guide: New markets for green bonds, the demand for green bonds has grown quickly on the investor side, with asset owners and managers diversifying their investment portfolios and seeking positive impact beyond financial return. In the light of the global commitment to shift to a green and low-carbon economy, the green bond market has the potential to grow substantially, while attracting more diverse issuers and investors. The number of green bonds continue growing daily.

Emerging and frontier markets are building the markets, financing facilities, and investment-grade debt and equity products for climate bonds and green investments more aggressively than most Western, developed economies.

Green bond reporting

The issuance of green bonds has led to considerable debate due to the lack of uniform rules governing them. Two primary voluntary regulatory standards govern the issuance of green bonds: the privately established Green Bond Principles (GBP) by the International Capital Market Association (ICMA) and the publicly organized Green Bond Standard (GBS) by the European Union. Both frameworks aim to achieve standardization within the green bond market, providing a uniform standard for varying stakeholder groups.

Despite the increased push for standardization, disparities persist in the issuance of green bonds, their post-reporting practices, and their alignment with issuer climate targets. Many issuers fall short in establishing long-term climate goals, frequently limiting their targets to a 10-year horizon. As a result, one key study found that green bonds predominantly serve short-term objectives, offering limited support for achieving long-term climate goals. Additionally, there is a lack of detailed breakdowns regarding how the capital raised through green bonds is allocated to specific projects, highlighting the need for enhanced transparency and reporting practices.

Criticism and controversies

The green bond market has attracted international criticism with some questioning the green credentials of certain bonds. This criticism pertains both to the projects that are funded, as well as the sustainability credentials of the issuers. In May 2017, the Climate Bonds Initiative refused to list a "green" bond issued by Repsol. The bonds proceeds would be allocated to initiatives meant to improve the efficiency of the company's oil and gas production operations. The non-governmental organization argued that even though the projects would reduce CO₂ emissions, the company's sustainability strategy did not go far enough from an environmental perspective to classify it as green. This criticism was extended to Vigeo Eiris, the company that reviewed the Repsol bond's green credentials. In 2016, Vigeo Eiris was involved in another green bond controversy. They were targeted by Western Sahara Resource Watch, a non-governmental organization backed by a Norwegian trade union, after it reviewed a green bond that would fund the production of solar projects by a Moroccan government agency in the illegally occupied territory of Western Sahara.

More generally, the academic community and market participants have identified the susceptibility of voluntary green-labelling to greenwashing and adverse selection as a function of the perceived lack of regulatory oversight and the inherent, albeit anecdotal, capital arbitrage opportunity presented to some issuers through the green pricing premium, or "greenium". In the primary market, this premium can exhibit varying spreads, ranging from -85 to +213 basis points, while the secondary market typically observes a more conservative average "greenium" of -1 to -9 basis points.