Green Bonds
What Are Green Bonds?
Long before sustainability became a boardroom discussion, bond markets existed to fund growth. Power plants, highways, factories, and public spending were financed with little visibility into environmental consequences. Green bonds appeared when that separation became impossible to ignore.
Green bonds are not meant to fund everyday spending. These bonds are not designed to cover everyday costs. Capital is directed toward environmental projects, often where climate or resource pressures are already evident. Over time, this has translated into funding for cleaner systems rather than symbolic initiatives. The bond itself does not look different from a conventional one. Coupons are paid. Maturity dates apply. What changes is what the capital is allowed to touch.
The value of green bonds lies less in innovation and more in discipline. They force issuers to draw a visible line between borrowing and environmental responsibility.
Use of Proceeds
Every green bond stands or falls on how its proceeds are used. Investors are not buying a promise of sustainability; they are financing defined outcomes. This is why issuers must clearly identify where the money will go before the bond ever reaches the market.
Most green bond activity ends up clustered around clean energy, building upgrades, transport systems, and water-related projects. Funds cannot be absorbed into general budgets. They must be tracked, separated, and reported against.
Unallocated proceeds are common, especially in large issuances. Even then, issuers are expected to handle interim funds responsibly and disclose how those balances are managed. Transparency at this stage determines whether the label “green” carries weight or suspicion.
Green Bond Principles
As the market expanded, the need for common expectations became obvious. This is where the Green Bond Principles gained importance. Rather than acting as a regulatory body, they serve as a shared reference point for issuers and investors.
The principles focus on process, not judgment. They do not define which activities are green. Instead, they outline how decisions should be made, disclosed, and reviewed. This includes how projects are selected, how proceeds are managed internally, and how information is communicated after issuance.
Their strength lies in adoption. Because they are voluntary yet widely followed, they have shaped market behaviour without restricting innovation.
Eligible Projects
Eligibility is rarely a simple checklist. While renewable energy and clean transport are widely accepted, other categories require context. Efficiency upgrades, adaptation projects, or pollution control measures must demonstrate environmental value without shifting harm elsewhere.
Issuers typically describe eligibility through a green bond framework. This document outlines project categories, exclusion criteria, and governance structures. It also explains who makes decisions and how environmental benefits are assessed.
Clear eligibility does more than satisfy investors. It protects issuers from reputational risk by setting boundaries before capital is raised.
Comparison: Green Bonds vs. Transition & Sustainability-Linked Bonds
While Green Bonds fund specific assets, the market has evolved to include instruments for transitioning industries and corporate-level targets. Understanding the difference is critical for issuers.
Certification and Verification
Trust in green bonds does not come from self-declaration alone. Independent review plays a crucial role. Verification helps confirm that a bond aligns with stated frameworks and recognised standards.
Reviews are handled in many ways, sometimes through independent opinions and sometimes through certification or follow-up checks. There is no single approach that works for every issuer.
External review is not required, yet investors often notice its absence. In a market sensitive to credibility, verification has become an expectation rather than an advantage.
Green Bond Reporting
Green bond reporting is where commitments meet evidence. Issuers are expected to publish regular updates throughout the bond’s life.
Allocation reporting answers a basic question: where did the money go? It details the capital assigned to each project and the amount that remains unallocated.
Impact reporting goes further. It attempts to measure environmental outcomes, such as emissions avoided or energy generated. These figures are not perfect, but they provide a basis for accountability. Investors are less interested in absolute precision than in consistency and honesty.
A credible green bond impact report does not oversell results. It explains assumptions, limitations, and methodology in plain terms.
Market Size and Trends
The green bond market did not develop in a single wave, and its expansion has been uneven. Early activity sat mainly with development institutions, while broader participation took time to build. Governments, banks, and corporates entered at different points, and issuance gradually spread across regions and currencies as the instrument became more familiar.
Market drivers have also differed by geography. In some cases, policy direction influenced issuance, though it was rarely the only factor. European bonds tend to reflect closer alignment with regulatory frameworks, whereas issuance in the United States relies more on issuer-defined approaches and voluntary standards. The result is variation in structure and disclosure rather than a uniform market model. The effect of this difference is visible in disclosures and structure, though not uniformly.
Green bonds now turn up in many fixed-income portfolios, sometimes alongside conventional instruments and sometimes treated separately. Practices around structure and reporting still differ, and there is little sign that the market has settled on a single approach.
Risks and Greenwashing
Risks around greenwashing have not disappeared from the green bond market. Credibility can erode quickly when labels are applied without tight project boundaries or when disclosures feel incomplete.
Problems tend to surface where eligibility definitions are broad or loosely interpreted. Thin reporting and optimistic impact claims add to the issue, particularly when assumptions are not clearly explained. In several cases, criticism has emerged even when environmental intent was present, but communication failed to meet investor expectations.
Scrutiny often focuses on disclosure rather than on the projects. When small gaps recur, they can attract more attention than bigger issues that are addressed directly.
How to Issue a Green Bond
Issuing a green bond is rarely handled by a single team. Initial steps tend to centre on agreeing on which projects qualify and documenting that scope in a framework.
External review follows, ensuring alignment with recognised principles. Once validated, the bond is structured like any other debt instrument and issued through standard market channels.
The real work begins after issuance. Ongoing reporting, disclosure, and internal tracking determine whether the bond retains its green credibility over time.
For issuers, green bonds are not just a funding tool. They are a public commitment, one that remains visible long after capital is raised.
FAQs
What is a green bond?
A green bond is a type of bond whose proceeds are linked to environmental projects rather than general spending. The green bond definition is based on how proceeds are used and tracked, not on the bond’s financial structure.
How are green bonds different from ESG bonds?
Green bonds focus only on environmental use of proceeds, while ESG bonds may support broader sustainability or governance goals. Green bond principles require clearer project boundaries and more specific green bond reporting.
Who can issue green bonds?
Governments, development banks, financial institutions, and corporates can issue green bonds. What matters is not the issuer type, but whether the bond follows recognised green bond principles and disclosure practices.
What is impact reporting for green bonds?
Impact reporting explains the environmental outcomes achieved with bond proceeds. Green bond reporting usually includes metrics such as emissions avoided or energy generated, alongside allocation details.
Are green bonds safer?
Green bonds carry financial risks similar to those of conventional bonds issued by the same issuer. Green bond certification under frameworks like the Climate Bonds Standard can improve transparency, but it does not change credit risk.