By Mack Bhatia
About Green Bond Principles
The green bond market aims to enable and mobilize debt markets to fund projects that contribute to environmental sustainability. Green bonds facilitates capital-raising and investments for new and existing projects which have environmental benefits and can mitigate risks associated with climate change. With over 1,500 green bonds issued in 2018, valued at more than USD 175 billion, the green bond market is growing at a fast pace. It is estimated that by 2019, green bond issuance will surpass USD 210 billion. More on issuing a green bond
“The Green Bond Principles (GBP) formulated by International Capital Market Association (or ICMA), are voluntary process guidelines that recommend transparency and disclosure, and promote integrity in the development of the Green Bond market”, ICMA.
The ICMA Green Bond Principles provide guidance to issuers on the key components needed to issue a green bond. Issuers who intend to launch a green bond are required to build a Green Bond Framework, which should align to the following four components as specified under the Green Bond Principles.
- Use of proceeds:At the core, it is imperative that the use of proceeds (associated funds) are utilized to finance or re-finance green projects. The Green Bond Principles explicitly define the eligible categories under which projects can be labelled green. These projects should contribute to environmental objectives such as: climate change mitigation, natural resource conservation and pollution prevention and control.
- Process for project evaluation & selection: Green bond issuers should clearly communicate the environmental sustainability of the projects to their investors. A high level of transparency into the issuer’s overall objectives, strategy and policy is encouraged. This includes the environmental objectives of the project, the process by which an issuer determines the green eligibility of the project and the process to manage any potential material, environmental or associated social risks.
- Management of proceeds: The GBP specify that proceeds (funds) are managed properly in a sub-account, a sub-portfolio, or are attested by the issuer in a formal internal process. This process should be linked and aligned to the lending or investment operations for green projects. The GBP recommend a high level of transparency and an issuer should, to the best of its ability, articulate the process by which it is managing the proceeds.
- Reporting: Reporting is an integral part of an issuer’s Green Bond Framework. Issuers are required to report on the allocation of proceeds to eligible green projects. This is usually communicated in an annual report where the issuer can specify the list of green projects, provide a brief description of the projects and stipulate the respective allocations. The issuer may also report on the expected impact of its green bonds.
The recently published “Handbook – Harmonized Framework” by ICMA defines the core principles and recommendations for green bond impact reporting. The handbook also spells out sector-specific guidance and reporting metrics for issuers.
Green Bond Framework
A Green Bond Framework is a document created by the issuer that clearly articulates the company’s proposed use of proceeds from the bond. The framework should include information on the eligible categories (as per the GBP) under which the projects being financed or re-financed fit. This transparency and disclosure enables investors to better assess the green eligibility of the projects and make more informed investment decisions. It is recommended that issuers obtain a second opinion on their green bond framework from an external review provider such as Sustainalytics to confirm its alignment with the four components of the Green Bond Principles. This step adds credibility to the issuer’s proposal to issue a green bond.
For more information, please refer to this presentation from the 2019 Green Bond Principles and Social Bond Principles Annual General Meeting conference.
Sustainability Bonds Guidelines
Some green projects may also have social benefits. In such cases the use of proceed categories should be determined by the projects’ primary objectives. When there is an intentional mix of environmental and social benefits, the bond is referred to as a Sustainability Bond, for which the ICMA provides separate a separate set of guidelines namely Sustainability Bond Guidelines. Get in touch with our team to learn more about green bonds and sustainability bonds.