Investors seeking out investment opportunities with a positive environmental impact may be interested in learning more about green bonds. Green bonds are similar to a traditional corporate bond issuance, except the use of proceeds from the offering are used by the company to fund sustainable projects. In order for the bonds to be marketed to investors as green, the company must describe how the net proceeds from the bond issuance will be used to finance new or existing “eligible green projects.”

There is no standardized or legal definition of what constitutes a “green” or “sustainable” project. The International Capital Markets Association (ICMA) publishes the Green Bond Principles (GBPs), which provides voluntary process guidelines for issuing green bonds. Another useful resource is the Climate Bonds Standard (CBS), which is a voluntary international certification for sustainable investments.

A number of sustainable projects may qualify as “eligible green projects.” The following list from the GBP provides examples of the categories of such projects:

• Renewable energy
• Energy efficiency
• Pollution prevention and control
• Environmentally sustainable management of living natural resources and land use
• Terrestrial and aquatic biodiversity
• Clean transportation
• Sustainable water and wastewater management
• Climate change adoption
• Circular economy adapted products, production technologies and processes
• Green buildings

Under the Green Bond Principles, there are four core components of disclosure to any green bond issuance. Information about how the company’s green bond program is aligned with these four core components is usually provided to investors in the offering memorandum associated with the green bond issuance.

• Use of Proceeds: The company should clearly set forth how the net proceeds will be allocated toward eligible green projects. If some of the proceeds will be used for refinancing, the company should clarify what percentage is intended for financing versus refinancing recently completed or future eligible green projects.
• Process for Project Evaluation and Selection: The company should articulate to investors its process for identifying and selecting green projects. The company may establish a Green Financing Committee or similar committee that is tasked with the responsibility of selecting and overseeing the company’s eligible green projects.
• Management of Proceeds: The company should disclose how the net proceeds of the green bond issuance are being managed. The company’s internal Treasury or Finance team often is tasked with the responsibility of managing the allocation of the net proceeds to eligible green projects. If funds that are pending allocation are held in a temporary sub-account, that information should be disclosed.
• Reporting: The company typically will disclose how frequently they intend to publish an impact report on their website setting forth information about the allocation of funds to eligible green projects. The company should also keep investors informed of any material changes to previously provided estimates or assumptions.

The offering memorandum may also disclose whether the company has retained an external party to provide a second party opinion on their green bond programs. The company may also have an external auditor provide a post-issuance assurance report on an annual basis. This verification report would provide continued assurances that the company is still on track to allocate the net proceeds of the green bond issuance to eligible green projects.