A guide to Green Bonds and the four components of the Green Bond Principles that define them

Green Bonds play an essential role in attracting capital to finance new and existing projects that offer climate change and environmental benefits as the world transitions to a sustainable global economy. 

Watch the video below featuring our CEO, Alper Deniz, to get a quick understanding of Green Bonds and the four components of the Green Bond Principles that define them. 

Prefer to read about Green Bonds? Scroll past the video for a quick and easy to read guide to Green Bonds. 

Video guide to Green Bonds

Green Bonds and the four components of the Green Bond Principles that define them

Here at Truva Trustees we’ve recently closed several transactions where we have acted as trustee on Green Bonds, so we like to think we know a thing or two about what they are and how they work. Here’s a quick guide…

What are Green Bonds? 

Essentially, a Green Bond is a type of fixed-income instrument that is specifically set up to raise money for projects with a clear environmental benefit. 

Green Bonds must also be aligned with the guidelines and principles set by the ICMA (International Capital Market Association). 

The first Green Bond was issued in 2007 by the European Investment Bank, it was labelled a ‘Climate Awareness Bond’ and its proceeds were dedicated to renewable energy and energy efficient projects. 

The World Bank issued its first Green Bond in 2008, a SEK 2.3 billion bond with a maturity of six years for a group of Scandinavian investors.

Green Bonds are sometimes also referred to as ‘Climate Bonds’. They typically come with tax incentives to enhance their attractiveness to investors.

Green Bond Principles

The ICMA has set out four core components to the Green Bond Principles. All Green Bonds must comply with these principles. 

Here is a list of the four components: 

1. Use of proceeds

The first component of the GB Principles is around the use of proceeds of the bond. In other words, is the money being raised being used for projects which contribute to environmental objectives? 

Examples of projects that contribute to environmental objectives include projects dealing with…

  • Renewable energy
  • Energy efficiency
  • Pollution prevention
  • Biodiversity
  • Conservation
  • Clean transportation
  • Sustainable water and waste management
  • Green buildings. 

There is no definitive list, but the objectives of the Green Bond Principles are clear. 

2. Process for project evaluation and selection 

The second principle is that the issuer of a Green Bond needs to be able to communicate clearly to investors the basis on which projects are selected and evaluated. 

3. Management of proceeds 

The third principle is that the proceeds of the Green Bond need to be capable of being independently verified and tracked. 

4. Reporting

The fourth and final principle is that the issuer of a Green Bond needs to keep up-to-date information and needs to report this at least annually and each time there are material developments. 

The ICMA also recommends that an issuer of a Green Bond appoints an external party to review the environmental features of the bond and this can be done in a number of ways. 

Why would an issuer issue a Green Bond? 

By issuing a Green Bond an issuer is signaling a clear commitment to dealing with environmental issues by financing projects with environmental benefits. This is hugely important as the world transitions to a sustainable global economy. 

A Green Bond should also enable an issuer to access a much broader investor base to achieve their fundraising aims and perhaps to access subsidies or other incentives. 

Hopefully we’ve been able to give you a really clear guide to Green Bonds and the principles that guide them. 

If you have any questions about Green Bonds or anything else relating to sustainable finance please do hop over to our contact page to get in touch with us.