Green bond
What is Green bond?
A green bond is a debt instrument whose net proceeds are designated for eligible projects with environmental benefits under a defined framework.
Portfolio reporting should not count the issuer's entire enterprise as green merely because one eligible bond is held. Track instrument-level allocation, project category, unallocated proceeds, reporting date, external review, and controversies, then separately analyze the issuer's overall strategy, credit risk, and emissions. Comparable ordinary debt should remain visible beside it.
Currency, maturity, liquidity, and seniority must remain comparable.
Use-of-proceeds structure
Most green bonds have the same general credit exposure as the issuer's ordinary debt unless documentation provides recourse to specific assets. The green label concerns proceeds, not automatic project collateral or superior credit quality. Eligible categories can include renewable energy, efficiency, clean transport, water, pollution prevention, buildings, biodiversity, and climate adaptation.
Core process
A credible framework describes use of proceeds, project evaluation and selection, management of proceeds, and reporting. Issuers commonly obtain pre-issuance external review and may later report allocation and impact. Standards and taxonomies can guide eligibility, but legal status and market practice vary. Investors must read transaction documents rather than infer protections from the label.
Financial analysis
Analyze issuer credit, structure, seniority, maturity, currency, covenant, liquidity, and valuation as for comparable bonds. A greenium, or pricing difference versus ordinary debt, can lower investor yield. Whether that is acceptable depends on mandate, scarcity, liquidity, and expected risk. Environmental credentials cannot compensate for inadequate credit return or weak documentation.
Impact and additionality
Allocation shows where proceeds are assigned, while impact reporting estimates project outputs or outcomes. Refinancing an existing asset differs from funding a new one but can still support a financing framework. Assess project baseline, ownership share, methodology, life cycle, adverse effects, and double counting. Purchase in a secondary market does not itself fund a new project.
Practical due diligence
Review framework, taxonomy, exclusions, lookback period, unallocated cash, external review, allocation, impact, controversies, and consequences of noncompliance. Confirm whether commitments are contractual. Compare with issuer-wide transition and capital expenditure because a small green issue can coexist with harmful activity. Monitor reporting after issuance rather than treating the initial label as permanent assurance.
Sources and further reading
- Green Bond Principles, International Capital Market Association