What are Green Bonds?

The bond markets have in recent years witnessed the emergence of a specialist new product referred to as ‘Green Bonds’. Green finance was developed therefore by the financial markets to direct capital towards activities designed to mitigate climate change and improve the environment. The United Nations Framework Convention on Climate Change, the UNFCC and the Paris Accord are international environmental treaties adopted to make the world more green.

‘Green’ refers generally to any financing where the money borrowed is used to reduce carbon emissions, fight pollution or clean up the environment. Together ‘Green’ and ‘Social’ funding are often referred to as ‘Sustainability Bonds’ in the capital markets where the money raised might include contributing to fighting global warming and addressing social problems.

‘Green Bond Principles’ were first published in 2014. The essential element that sets green finance apart from other types of borrowing concerns what is done with the money borrowed. In the case of ‘Green Bonds’, everything hinges on the ‘use of proceeds’ statement. The issuer has to specify what it will do with the money and justify it being for ‘Green’ purposes. Therefore the internationally agreed Green Bond Principles rely upon four ‘pillars’ and a fifth key supporting element.

Finally, the Fifth element is an external review.

As the market has grown, different types of organisations have offered to provide external reviews. These fall into the following broad categories:

The finance industry has done a good job working together to agree and enforce important principles. This is done by an Executive Committee (‘ExCom’) of the Green Bond Principles, made up of major market players drawn from the ranks of bond market investors, issuers and arrangers.

Issuers hope to enjoy a reputational uplift from being seen to contribute towards the fight against global warming. Green bonds ensures some investor diversification, some greater certainty of execution success in the current market and a more stable investor base. We can expect this market to grow and develop quite quickly.