Green Bond
Green Bond — is a bond that is issued to support ecological projects and attract investments to them. The money flow of funds received from these bonds goes to projects related to biodiversity conservation, recycling, emission reduction, sustainable agriculture, or forest restoration. The process of the disposition of funds should be described in the supportive documentation to prove the appropriate money distribution. Sometimes the green bonds are confused with the climate bonds. But they are a bit different. The climate bonds are aimed solely to finance the projects aimed to fight against climate change.
What Is Green Bond
The trend toward the ecological agenda has become widespread. To support the ecological initiatives the business community has decided to issue green bonds. The emission of green bonds is one of the aspects of responsible investment and ESG (Environmental, Social, and Governance) rules. Compliance with the ESG frameworks helps the company develop the proper risk management.
Net proceeds from these bonds, or an amount equal to them, should be placed at a separate account, formed into a separate portfolio, or otherwise separately accounted for by the issuers. The method of accounting should be fixed as a separate internal procedure related to lending and investment.
To receive the official status of a green bond, the issue of bonds should comply with the special principles — Green Bond Principles (GBP), or meet the requirements of the Climate Bonds Initiative. GBP describes the proper usage of proceeds. They can be found on the site of the International Capital Market Association (ICMA). ICMA is an international self-regulatory organization and trade association of the international financial market. Climate Bond Initiative is an international organization that mobilizes the capital to fight against climate change.
The quality of green bonds should be confirmed by an external expert from the verifier company. If the independent review has no questions about the use of funds, the bonds can be considered green. However, even after the release of securities on the market, issuers should regularly report on spending and implementation of their environmental work.
By issuing green bonds, organizations receive significant advantages: improved image, the attraction of new investors and resources for eco-projects on favorable terms, and special benefits. They are exempt from coupon payments, this function is fully or partially taken over by the state. Investors can be exempt from payment of income tax on interest of green bonds.
As a result, the state receives a guarantee for the implementation of an environmental project, the issuer receives a loan on favorable terms, and investors receive tax-free income. This is another reason for the popularity of green bonds.
The checking of green bonds is important because greenwashing has become a serious issue in modern business. Many companies try to create an eco-friendly image to attract new customers when in reality, they have malpractice and non-observance of ecological standards. After the disclosure of information related to the greenwashing of several major companies, the problem of greenwashing became really serious.
How to find out whether a bond is green? You need to find information about the issuing company in a reliable source. The bonds should be verified under international requirements. You need to see a clear end goal, the way from which the money is going. The intended use is typical for green bonds. From the predicted figures, you can find out what impact the investment will have. It is also necessary to pay attention to the planned time frame for the implementation of the project.
History of Green Bonds
The topic of green investing had arisen in 2007 after the publication of a report on the causes of climate change. According to this report, the global greenhouse gas emissions had significantly increased, and this process caused climate change. As a result, several pension funds in Sweden were concerned about responsible investment, so it was necessary to find the right usage of the invested funds. In the same year, a group of funds approached a local bank to resolve the issue.
The initiative reached the World Bank, where the optimal solution was found. To reduce investment risks and contribute to environmental protection, the bank proposed the introduction of "green bonds". So the organization combined standard investment and climate monitoring.
However, it was necessary to approve the right usage of these bonds. To do so, they began to apply for expertise at the Center for International Climate and Environmental Research. The first green bond was issued in 2008. At the same time, they established a procedure for selecting projects that claim to attract investment through green bonds. Many environmental and climate startups appeared which evaluated the implementation of the offered projects. In 2013 large companies began to issue green bonds. Since then, the issuance of such bonds has significantly increased.
