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Most Frequently Asked Questions – Green Bonds

Posted on April 2, 2019

Morningstar Sustainalytics
Morningstar Sustainalytics

Most common Questions for Green Bond Issuance

What are Green Bonds?

Green bonds are like any other conventional bonds except that the issuer promises to use the proceeds for green investments, green projects or eligible green assets being refinanced.

Who can issue Green Bonds?

Any government or business entity who can issue a bond can also issue a green bond. Also, a banking institution can raise long term funds using a green bond as a financial instrument.
In fact, any institution which has never issued a bond, but has a reasonable chance of being credit worthy can potentially issue a green bond.

Who buys Green Bonds?

The green bond market has grown exponentially over the past few years. The demand for green, social or sustainability bonds has also been triggered by more awareness among the investors looking for companies with an easier transition to the green economy, and by end customers who are more willing to buy sustainable products.

The green bond market has seen surge in support from institutional investors, retail investors, governments, treasuries and from central banks, who are interested in buying green bonds. These investors are eager to invest in a credible green bond. Learn how a second-party opinion makes a green bond credible.

Why issue Green Bonds?

Green bonds, social bonds or sustainability bonds are a great opportunity for issuers for the following reasons:

  • Green bonds are a great marketing device – Many investors care about the environment and the climate change. Green bonds or sustainability bonds have similar risks to conventional bonds. Investing in green bonds offers the opportunity to invest in an equivalent risk instrument with a positive purpose.
  • Stickiness - Banks have reported that their customers are asking for more green bonds or similar instruments such as social bonds or sustainability bonds. These financial instruments can help banks develop deeper relationships with investors. The common purpose to help the environment or to invest in a positive social outcome brings in an outstanding cohesiveness to the business relationship. Hence, investors encourage banks and ask for more instruments such as green bonds.
  • Green Bonds and Stock Price – A strong correlation is observed between corporates that issue green bonds and their stock price. We believe that investors are looking at corporates’ sustainability/ESG performance to better understand which ones are well positioned to transition to a green economy. Corporates with higher levels of sustainability performance and with a lower policy risk are attractive to investors.

What are Green Bonds used for?

Green bonds started off as a tool to mainly finance renewable energy projects. They are now used to help finance any project/initiative that are relevant to our transition to a low-carbon economy and that helps to address new environmental challenges.

Examples of relevant projects include renewable energy, green buildings (energy efficient buildings), water investments, and even agriculture investments. In some cases, green bonds have also been considered to fund technology projects such as the use of broadband and its potential to reduce emissions.

What is the difference between Green, Social and Sustainability Bonds?

Green, Social and Sustainability Bonds are three different labels for bonds and require adherence to different principles as defined by ICMA (International Capital Markets Association).

Refer to the infographic: Green Bonds, Social Bonds, Sustainability Bonds 

What is a Second-Party Opinion? Why need a Second-Party Opinion?

Issuers can self-label a bond as green and disclose their eligibility criteria through the bond’s framework.

However, investors are often looking for more transparency when gathering the details of the bond. This includes use of proceeds, project evaluation criteria, management of proceeds and issuers reporting on the green bond.

A second-party opinion by a trusted and a respected evaluation firm provides a clear assessment of the issuer’s green bond framework. A second-party opinion strengthens the credibility of the bond and helps gain the confidence of investors looking to invest in a green bond.

What are other names for a Second-Party Opinion?

Second-party opinions are also known as External Review of a Bond or an External Verification of the Bond. It is an independent assessment of an issuer’s green bond, social bond or sustainability bond framework.

Issuing a Green Bonds is not a complex process but follows the same process as any other conventional bond. Learn more about the Steps to Issue a Green Bond.

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