Green bonds are fixed-income securities used to finance environmentally sustainable projects. They are issued by a variety of entities, including governments, corporations, and development banks. The principles of green bonds include transparency and accountability in the use of proceeds, as well as the provision of clear information to investors about the environmental impact of the projects being financed.
According to the Climate Bonds Initiative, a non-profit organization that tracks the global green bond market, there were $257.7 billion worth of green bonds issued in 2019. This represents a significant increase from previous years and demonstrates the growing popularity of green bonds among investors.
By Statista, in 2021, the green bonds reached a peak were $582 billion worth of green bonds issued. In 2022 it decreased slightly, when green bonds issued amounted to $487 billion.
There have been several studies examining whether green bonds offer a premium over conventional bonds. While results have been mixed, some studies have found evidence of a green bond premium, which may reflect investor preferences for environmentally sustainable investments.
Green bonds are typically supervised by the same regulatory bodies that oversee conventional bonds. However, there are also organizations that specialize in promoting transparency and accountability in the green bond market, such as the Climate Bonds Initiative.
One potential problem with the lack of mandatory global standards or legislation governing the issuance of green bonds is that the criteria for what qualifies as a "green" project may be questionable. Without clear guidelines, it can be difficult to determine whether a project is truly environmentally sustainable or if it is merely being marketed as such to attract investment. This could lead to a situation where funds raised through green bonds are not being used in the most effective way possible to combat climate change.
One example of a public case where a green bond was misleading is the Deutsche Bank's green bond issued in 2017. The bond was marketed as a way for the bank to finance environmentally sustainable projects, but it was later revealed that the bank used the funds to refinance existing projects that did not meet green bond criteria. This led to criticism from investors and calls for greater transparency and accountability in the green bond market.
While there is no mandatory global standard or legislation governing the issuance of green bonds, there are a number of voluntary standards and guidelines that have been developed by organizations:
The International Capital Market Association.
In the United States, the Securities and Exchange Commission has issued guidance on the disclosure requirements for green bonds.
There are four key disclosure elements for green bond issuers: Use of proceeds, process for project evaluation and selection, management of proceeds, and reporting.
Reporting is one of the most important disclosure elements to ensure transparency. Holders should report both qualitative and quantitate effects of the bonds. The annual report should include where green bond proceeds are allocated, descriptions of the projects, and the impact of the project. In doing so, this ensures accountability regarding ESG usage from green bond funds and projects.
The SEC guidelines for disclosure of green bonds attempts to put green bonds on the same standards as any other financial contract. In order to have success, there should be open transparency and disclosure surrounding these contracts.
The European Green Bond Standard (EUGBS) is a proposed set of guidelines for green bonds issued in the European Union. The standard aims to promote transparency and clarity in the market for green bonds, which are used to finance environmentally sustainable projects. The standard will provide criteria for determining which projects are considered to be environmentally sustainable and therefore eligible for green bond financing.