Green bonds

Publication May 2017

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 foot print of its ordinary business activities. As such, 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 really 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.

It is expected that issuance of green bonds is likely to accelerate not only because this aids diversification of investor pools, but because of investors' growing intention to implement environmental, social and governance (ESG) targets initiated by the United Nations Principles for Responsible Investment (PRI). As of April 2016, the 1,500 investors who had signed up for the PRI community represented approximately US$62 trillion of assets under management. In addition, the PRI has encouraged stock exchanges to enhance ESG disclosures among their listed companies. 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 as follows:

Green use of proceeds bond

This is a standard recourse-to-the-issuer debt obligation for which the proceeds shall be held in 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 investment, 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

This 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 shall 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 investment, 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

This 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

This is a bond collateralised by one or more specific projects, including but not limited to 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, 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):

  1. Renewable energy
  2. Energy efficiency (including energy efficient buildings)
  3. Pollution prevention and control
  4. Sustainable management of living natural resources
  5. Terrestrial and aquatic biodiversity conservation
  6. Clean transportation
  7. Sustainable water management (including clean water and/or drinking water)
  8. Climate change adaptation
  9. 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.


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

  1. Third party reviews and consultations – recognised experts in environmental sustainability may review or help in the establishment of the issuer's process for project evaluation and selection. Such reviews and reports are private and may be made publicly available only at the discretion of the issuer;
  2. 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;
  3. Third-party certifications – these may be used to provide assurance on the green credentials of green bonds (See further below); and
  4. Ratings – a number 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.

Rating agencies have also been working on developing a framework for assessing how ‘green’ a project is. S&P Global Ratings has recently launched its Green Evaluation which assesses this on project(s) specific basis and on instruction (this evaluation will not automatically continue during the life of the project(s), unlike credit rating evaluations).A number of stock exchanges (including the London Stock Exchange 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.

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. As part of this growth, 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 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, issuers who would use the proceeds to finance projects towards its environmentally and socially responsible 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.

The specific structure for a green bond can be determined based on the circumstances of the issuer and the applicable green projects.

Recent publications

Subscribe and stay up to date with the latest legal news, information and events...