Green bonds are debt securities for which the proceeds are exclusively used to promote climate and environmental sustainability purposes.
For a bond to qualify as ‘green’, its proceeds should be used for projects with clear environmental benefits that can be described and quantified or assessed, such as renewable energy or waste management.
In 2014, the Green Bond Principles (GBP) were established with the aim to promote integrity in the green bond market through guidelines that recommend transparency, disclosure and reporting. More specifically, issuers should establish impact objectives and engage environmental reviews of the projects. The proceeds should be moved to a sub-portfolio which is ring-fenced, and an auditor should be appointed to track the flow of funds. Reporting on the use of proceeds along with the qualitative or quantitative indicators of the environmental impact should be done at least annually.
The green bond market took off in 2007 with the issue of the Climate Awareness Bond by the European Investment Bank. According to Bank of America Merrill Lynch, the total outstanding amount of green bonds exceeded USD 200 billion in 2017. Issuers of green bonds now include corporates, supranationals, governments and municipalities.