Green bonds

Publication November 2018


This article was originally published on LexisPSL Banking & Finance in June 2018.

Green bonds are a natural source of financing for issuers who have a financing or refinancing requirement for a green project. There does not currently appear to be a premium for green bonds compared to non-green bonds of the same issuer. Further, an issuer who would use the proceeds to finance projects towards its environmentally friendly programmes (for example, to reduce the carbon footprint or waste from its ordinary business activities) could also tap the market and further signal its commitment to its cause. Green bonds can be attractive to issuers and investors alike with the right balance on the green and commercial aspects.

What are green bonds?

Green bonds are bond issues whereby the proceeds are ring-fenced and exclusively applied to finance or re-finance in part or in full new and/or existing projects that will promote progress on environmentally sustainable activities.

Green bonds have historically been issued by multilateral lenders such as the World Bank, the African Development Bank and the European Investment Bank. However, corporates have increasingly issued green bonds to increase market appeal to a broader investor class, and particularly if the proceeds will be used in any case for environmentally friendly projects such as development of renewable energy. Unilever has taken this further by issuing green bonds, the proceeds of which will be used to reduce the environmental footprint of its ordinary business activities. There is potential scope for issuers to tap this market to help fund their efforts to be environmentally and socially responsible in their ordinary course of business.

Sovereign issuances of green bonds have also taken off with the first sovereign green bond being issued by Poland in December 2016, followed by the record €7 billion issuance by the Republic of France in January 2017 and numerous sovereign issuances since including by the Province of Québec.

We expect to see an acceleration in the issuance of green bonds, not only because this aids diversification of investor pools, but also because of investors' growing intention to implement environmental, social and governance (ESG) targets initiated by the United Nations Principles for Responsible Investment (PRI). There are over 1,900 PRI signatories representing approximately US$70 trillion of assets under management. Asset managers are developing new products to meet the demands of investors who appreciate competitive yields but which also support green projects.

Types of green bonds

The green credentials of green bonds can be broadly structured and categorised in the following ways.

Green use of proceeds bond

A “green use of proceeds bond” is a standard recourse-to-the-issuer debt obligation for which the proceeds are held in a sub-portfolio or otherwise tracked by the issuer and attested to by a formal internal process that is linked to the issuer's lending and investment operations for projects.

The Green Bond Principles (explained below) recommend that issuers disclose to investors the types of temporary investment instruments for the balance of unallocated proceeds.

Green use of proceeds revenue bond

A “green use of proceeds revenue bond” is a non-recourse-to-the-issuer debt obligation in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes, etc, and the use of proceeds of the bond goes to related or unrelated green projects. The proceeds are moved to a sub-portfolio or otherwise tracked by the issuer and attested to by a formal internal process that will be linked to the issuer's lending and investment operations for projects.

The Green Bond Principles recommend that issuers disclose to investors the types of temporary investment instruments for the balance of unallocated proceeds.

Notably, the underlying collateral need not always be “green” as demonstrated by the green bonds issued by Toyota in March 2014. The structure involved the securitisation of auto loans to collateralise its green bonds, the issuance proceeds of which were allocated to fund the development of environmentally-friendly automobiles.

Green project bond

A “green project bond” is a project bond for a single or multiple green project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer.

Green securitised bond

A “green securitised bond” is a bond collateralised by one or more specific projects, such as covered bonds, asset-backed securities and other structures. The first source of repayment is generally the cash flows of the assets securing the bonds. This type of bond covers, for example, asset-backed securitisations of rooftop solar photovoltaic.

Green Bond Principles

The Green Bond Principles are voluntary guidelines set out by the International Capital Markets Association (ICMA), an industry body. They are intended to encourage transparency and disclosure, and promote integrity to facilitate the development of the green bond market. They are designed to provide issuers with guidance on the key components involved in the issuance of green bonds.

In June 2018, 162 institutions (including Bank of America Merrill Lynch, Citi, Credit Agricole CIB, HSBC, JP Morgan, Skandinaviska Enskilda Banken AB, Blackrock, Natixis, Zurich Insurance Group, EDF S.A. and ENGIE) who have issued, underwritten or placed, or invested in green bonds signed up to the Green Bond Principles as members and 127 organisations who are not yet in the market have received observer status. The Green Bond Principles are administered by ICMA as Secretariat.

The Green Bond Principles do not seek to define what green bonds are, or set out comprehensively eligible categories of green bond projects. Rather, they recommend that issuers communicate their use of proceeds categories clearly and transparently so that investors can make their decisions based on their determination of the bond's consistency with their investment strategy. By facilitating greater disclosure, they aim to assist at the point of making investment decisions and buttress the green credentials through accountability, assessment and reporting. As a result, investors will be better equipped to evaluate environmental and/or social impact.

The Green Bond Principles consist of four components: use of proceeds, process for evaluation and selection, management of proceeds and reporting.

Use of proceeds

Issuers should declare the eligible green project categories (including types of investments made indirectly through financial intermediaries) in the "Use of Proceeds” section of the legal documentation and disclosure for the green bonds. The Green Bond Principles recommend that clear environmental benefits be described and, where feasible, quantified and/or assessed.

The Green Bond Principles include a non-exhaustive list of certain types of recognised “green” projects as including

  • Renewable energy (including production, transmission, appliances and products)
  • Energy efficiency (such as in new and refurbished buildings, energy storage, district heading, smart grids, appliances and products)
  • Pollution prevention and control (including waste water treatment, greenhouse gas control, waste reduction/prevention/recycling, and soil remediation)
  • Environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture, fishery, forestry, and climate smart farm inputs such as biological crop protection or drip-irrigation)
  • Terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine and watershed environments)
  • Clean transportation (such as electric, hybrid, public, rail, non-motorised transportation and infrastructure for clean energy vehicles)
  • Sustainable water management (including sustainable infrastructure for clean water and/or drinking water, sustainable urban drainage systems or flooding mitigation)
  • Climate change adaptation (including information support systems, such as climate observation or warning systems)
  • Eco-efficient and/or circular economy adapted products, production technologies and processes (such as resource efficient packaging and distribution and the development of environmentally friendly products)
  • Green buildings which meet regional, national or internationally recognised standards or certifications.

The Green Bond Principles recommend that issuers provide an estimate of the share of financing versus re-financing, and where appropriate, also clarify which investments or project portfolios may be refinanced.

Process for evaluation and selection

Issuers should outline the decision-making process followed to determine the eligibility of the projects, including the type of projects the funds are meant to support, the criteria for assessing environmental benefits, and the environmental impact they expect the projects to produce. The processes for project evaluation and selection can be supplemented by a review by a third party.

Management of proceeds

Net proceeds should be moved to a sub-portfolio or otherwise tracked by the issuer and attested to by a formal internal process that will be linked to the issuer's lending and investment operations for projects. The Green Bond Principles recommend that issuers make known to investors the intended types of temporary investment instruments for the balance of unallocated proceeds.


Issuers should report at least annually via newsletters, website updates or filed financial reports on the specific investments made from the green bond proceeds, detailing (wherever possible with regards to confidentiality and/or competitive considerations) the specific projects and amounts invested along with the expected environmentally sustainable impact.

Investors are increasingly focused on impact reporting as an important mechanism not only for issuers to be accountable (on a soft-basis) on the achieved environmentally sustainable impact, but also as a metric to measure their own investment performance from a sustainability perspective.

Market participants have looked towards having a harmonised framework for impact reporting to facilitate issuers in the reporting process and also for investors to understand and compare the impact reports easily. The ICMA has developed a harmonised framework for impact reporting for the renewable energy and energy efficiency sectors.


The Green Bond Principles recommend that issuers use external assurance to confirm their alignment as set out above. Such assurance might include

  • Third party reviews and consultations – recognised experts in environmental sustainability may review or help in the establishment of the issuer's processes for project evaluation and selection. Such reviews and reports are private and may be made publicly available only at the discretion of the issuer
  • Audits – auditors may independently verify or audit, for example, the internal tracking method and the allocation of funds. Such reports and audits by qualified third parties or internal and/external auditors may be publicly disclosed at the discretion of the issuer
  • Third-party certifications – these may be used to provide assurance on the green credentials of green bonds (See further below)
  • Ratings – a number of credit rating agencies are developing their own green assessments to assist investors in determining how “green” a project is.

How green is green?

There is no single or universal standard to establish green credentials, in part because the potential scope and areas in improving environmental and social impact are quite vast and varied. Further new technologies and improvements are continuously developing. Neither is there a single authoritative body to provide a stamp of approval.

In light of this, issuers have procured various third parties to provide verifications or certifications on green credentials. They include Centre of International Climate and Environmental Research Oslo (CICERO), Vigeo, Climate Bond Initiative and Leadership in Energy and Environmental Design. These are neither exclusive nor exhaustive.

Credit rating agencies and stock exchanges have also made further developments in this area (see further below).

However, as environment and social improvements can take so many guises, there will continue to be scope for issuers to shape the approach and targets (provided there is transparency and disclosure at the outset) and for investors to support this (provided they receive information on progress and development).

Market development

The green bond market continues to develop and as it matures, further harmonisation in impacting reporting for other sectors are expected to occur. Issuers would continue to be sensitive to its reporting obligations, costs and any assessments and/or audits whereas investors would continue to review from yield, liquidity and benchmarking perspectives.

Green bond indices

From the inception of the green bond market, green bond indices (including those administered by MSCI, Barclays, Standard & Poor's, Bank of America Merrill Lynch and Solactive) have been launched to aid in benchmarking and liquidity. It is interesting to note that each of the indices have a slightly different criteria for inclusion on its index (be it issuer eligibility criteria, reliance on third party assessment, self-labelling, etc.) and this may facilitate or form part of an investor's investment criteria.

Green exchanges

A number of stock exchanges (including the London Stock Exchange Group and the Luxembourg Stock Exchange) have also set up green exchanges, with their own eligibility criteria. Most tend to require a third party review or “green” assurance in some form.

Green evaluation/assessment

One of the most recent market developments is has come from credit rating agencies which have developed frameworks for assessing how “green” a project is. S&P Global Ratings launched its Green Evaluation tool in 2017 which assesses how “green” a project is on a project-specific basis and on instruction (this evaluation will not automatically continue during the life of the project(s), unlike credit rating evaluations). Moody’s Investors Service launched a slightly different Green Bond Assessment framework in 2017 which evaluates the environmental credentials of issuers based on based on organisation, use of proceeds, disclosure of the use of proceeds, management of proceeds, and ongoing reporting and disclosure on the environmental projects being financed. The rating will be refreshed annually based on a “use of proceeds” report from the issuer.

Expansion of jurisdictions

There is an expanding coverage of jurisdictions where green bonds are issued. Recently this has been led by sovereign issuers (including Poland and France for conventional bonds, and Indonesia for sukuk issuance) and public sector issuers (such as the Transport for London and SNCF Reseau). To further facilitate the development of impact reporting, a working group of Nordic public sector issuers published a Position Paper on Green Bonds Impact Reporting in October 2017 which may be helpful to public sector issuers in other jurisdictions. This paper aimed at striking a balance between a commitment to report at a manageable level and providing detailed and verifiable numbers on the projects.

Next frontiers and trends

Green city bonds

An increase in the issuances of green bonds by cities is expected. Cities in the United States launched and led the way in issuances ahead of the Global Climate Action Summit held in San Francisco in September 2018. This is a natural evolution as cities currently account for 70 per cent of emissions and 50 per cent of the global population. With their populations expected to rise by 70 per cent by 2050, cities will be key in driving impact on climate change. Cities are projected to require at least US$1.7 trillion a year for climate change mitigation and adaptation purposes in order to align greenhouse gas levels with that required to limit global warming to 2°C.

Aggregation solutions

We expect to see increased aggregation structures being used, for example, the securitisation of green loans (and other asset-backed securities or covered bonds) which will create the pathway for a further maturing of the market. This has been facilitated by the Green Loan Principles which were published in March 2018.

Regulations and incentives

The High Level Expert Group in Sustainable Finance published its final recommendations to the European Commission on January 31, 2018. The European Commission has subsequently built upon those recommendations and published its Action Plan on March 8, 2018. This included, amongst others, the following

  • Creating an EU taxonomy
  • Creating standards and labels for green financial products
  • Fostering investments in sustainable infrastructure projects
  • Developing sustainability benchmarks
  • Better integrating sustainability in ratings and market research
  • Clarifying institutional investors’ and asset managers’ duties
  • Incorporating sustainability into prudential requirements
  • Fostering sustainable corporate governance and attenuating short-termism in capital markets.

As part of the Action Plan on the various workstreams taking place in the immediate future, the European Commission has tabled legislative proposals, established public consultations and invited feedback from other organisations, and appointed a technical expert group on sustainable finance. It is expected that this will significantly contribute to the development of the green bond market, and sustainable finance more generally.

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