The Green Bond Principles are voluntary guidelines set out by the International Capital Markets Association (ICMA), an industry body, that encourage transparency and disclosure and promote integrity in 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.
As of April 2017, 134 institutions (including Bank of America Merrill Lynch, Citi, Credit Agricole CIB, HSBC, JP Morgan Chase & Co., Skandinaviska Enskilda Banken AB, Blackrock, Inc. Natixis Asset Management, Zurich Insurance Group, EDF S.A. and ENGIE) who have issued, underwritten or placed, or invested in green bonds have signed up to the Green Bond Principles as members and 107 organisations who are not yet in the market have received observer status. The 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. What they do is to 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. The guidelines seek to facilitate disclosure of information to assist at the point of making investment decisions and also to buttress the green credentials through accountability, assessment and reporting in order that investors can evaluate environmental and/or social impact.
The Green Bond Principles consist of four components, set out below.
Use of proceeds
The issuer 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 principles recognise green projects as including (but not limited to):
- Renewable energy
- Energy efficiency (including energy efficient buildings)
- Pollution prevention and control
- Sustainable management of living natural resources
- Terrestrial and aquatic biodiversity conservation
- Clean transportation
- Sustainable water management (including clean water and/or drinking water)
- Climate change adaptation
- Eco-efficient products, production technologies and processes.
It is recommended 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
The issuer should outline the decision-making process it follows 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 process for project evaluation and selection can be supplemented by a review by a third party.
Management of proceeds
The 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. Pending such investments, it is recommended that the issuer 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.
The market has 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.