Green bonds

Legal assistance paper

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Date produced: 21/06/2018

Can you briefly explain what green bonds are and how they may be used by developing country parties to respond to climate change?


A bond is a debt instrument issued to investors by a government or company in order to borrow money (like a loan). The “bond” is the issuer’s promise to repay the debt and any interest. A “green” bond is one where the money borrowed is used for environment-friendly projects or purposes. However, there is no generally accepted definition of what these projects must look like and so there is no universal definition of a “green bond”.

Some companies and governments have issued green bonds by adopting their own view of the purpose for which the money borrowed is used and telling potential investors that they think those purposes are “green”. However, most bonds issued now reference at least one of the independently developed, market standards/frameworks for issuing green bonds. These provide more specific criteria that the issuer can follow so investors who buy the bonds can be comfortable that they are “green”.

The most common international standard is the International Capital Markets Association Green Bond Principles, which can be found here: (translations into a number of languages can also be found on the site). The four key components of the Principles are:

  1. Use of Proceeds – money borrowed must be used for projects that have clear environmental benefits. A list of specific categories of projects are set out in the Principles.
  2. Process for Project Evaluation and Selection – the issuer must have a process for identifying appropriate, green projects.
  3. Management of Process – the issuer of the bond must ensure the money borrowed is not used for anything other than the green projects.
  4. Reporting – the issuer of the bond must provide reports confirming that the money borrowed was used for green projects.

The Green Bond Principles also recommend (and it is now standard) for an “external review” of the green bond to be carried out.  This review is carried out by a specialist company who then provides a formal letter confirming that the bond meets the requirements of the Green Bond Principles and this letter is usually made available to the public.

An external review may also be conducted using other more specific standards, the most common being the Climate Bonds Standard issued by the Climate Bonds Initiative (more information can be found about the Climate Bonds Standard here: The Climate Bonds Standard provides a way of ensuring money borrowed by issuing “green bonds” is used for projects or assets that directly contribute to developing low carbon industries, technologies and practices that mitigate greenhouse gas emissions, or adaptation to the consequences of climate change.

The Climate Bonds Standard criteria describe in more detail what green projects should look like. The criteria are split into different sectors (e.g. Low Carbon Buildings, Low Carbon Transport and Wind Energy). Certification to the Standard requires that a specialist company “verifier” (that must be accredited by the Climate Bonds Initiative) provide a formal letter regarding compliance with the relevant criteria. If the Climate Bonds Initiative are happy with the letter (and all other information that require and receive) then the bond will be labelled with the Climate Bonds Standard certification (i.e. the logo of the Climate Bonds Standard can be put on the bond documents given to investors).

In the case of both the Green Bond Principles and the Climate Bonds Standard, the purpose of the external review of the green bond (and certification to the Climate Bonds Standard) is to give investors buying the bonds confidence that the money being borrowed by the issuer will actually be used for green, environment-friendly projects or other purposes. A green bond can comply with both the Green Bond Principles and the Climate Bonds Standard.

There is an increasing appetite for green bonds from both specialist environmental, social and governance-focused (ESG) investors, and also institutional investors (e.g. pension funds and insurers) with mandates to have a minimum percentage of their portfolio meeting ESG standards.  So a sovereign issuance by a developing country might attract more investors (or different investors) to a normal sovereign bond. It should be noted though that as yet there is no real evidence of any pricing difference between green and other bonds (i.e. it is not cheaper to borrow money through a green bond compared to a normal corporate or sovereign bond).

Green bonds, however, allow an issuer to clearly link the money being raised to “green” projects, including for the purposes of adapting to climate change. This means there can be no uncertainty about how the finance should be used. The bond issuer is in receipt of a clear mandate from investors to use the money received from the bond investors for the purpose of addressing climate change whereas a “normal” sovereign issuance would leave the use of the finance subject to normal pressures regarding use. This clear linking of finance to green purposes can also provide tangible evidence that a government/country is working toward and implementing its nationally determined contributions under the Paris Agreement.

A good case study is the recent green sovereign bond issued by Fiji. In October 2017, Fiji became the third nation (after France and Poland) to issue a sovereign green bond. The bond raised 100 million Fijian dollars (US$50 million) with a special emphasis on helping the country adapt to a changing climate. Projects financed by Fiji’s sovereign green bond will follow the internationally developed Green Bond Principles and focus primarily on investments that build resilience against the impacts of climate change. Fiji will also use bond proceeds for projects to accomplish its nationally determined contributions under the Paris Agreement.

The bond was very well received in the market and has received a lot of publicity. A guide regarding sovereign green bond issuance was recently issued by the International Finance Corporation (IFC) which has a particular emphasis on the Fijian green bond and can be found here:

The guide, emphasises the need for sovereign bond issuers to carefully identify potentially eligible green projects. This will help to determine the structure of the bond, which must also be suitable given the general financial standing of the government/sovereign issuer. As referred to above, significant importance is also placed on the assessment of the green projects by an external reviewer to ensure they qualify as ”green”. Transparency at every step of the process is also critical to the success of the green bond, so resourcing and expertise must be applied to monitoring and reporting on the use of the proceeds and the beneficial environmental impact of the green projects.

Issuing a green bond involves more work than a normal government or corporate bond. More work is required to set up the required processes (e.g. the ability to ensure money borrowed is used for green projects). There will also be additional costs incurred, including in relation to external reviews. However, with the collaboration of all government parties involved in the bond issue, accountability and consistency will be achieved and a successful green bond can be issued, increasing the sovereign bond issuer’s ability to meet their green economy objectives.

It should not be forgotten that corporate and financial institutions within a country can also help contribute to addressing climate change and other environmental issues within that country by issuing green bonds. Thought should, therefore, also be given to the kinds of support and assistance that can be provided to local banks and other financial institutions in particular in order to develop and issue green bonds (there have been very few corporate green bond issuances to date). This could include technical assistance and education programs in order to develop local skills and understanding of green bonds. Another possibility is subsidizing the additional costs associated with issuing green bonds (e.g. the costs of external review as referred to above). By incentivizing banks and similar organizations to provide finance to their customers which is green by linking their own borrowings to green outcomes through green bond issuance, a government can decentralize and increase the pace of beneficial environmental impacts.

In this context, it may be of interest to read about the recently launched IFC green bond fund. It will be investing in emerging market green bonds and also attempting to address some of the capacity issues (such as technical skills and costs) that may hinder local issuance. For example, not only will the fund be investing in green bonds issued in emerging market countries but it will also be providing funding for things like external reviews). More information on the fund can be found here: .