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.