In today's article, we'd like to introduce you to green bonds, which have the potential to become a popular financing tool for sustainable development projects. Green bonds are a type of debt security that allows issuers to raise capital for projects that are expected to have a positive impact on the natural environment.
In international trading, in order for bonds to be recognized as green, they must go through a certification process for which ICMA ( International Capital Market Association ) is responsible.
ICMA also authored the Green Bond Principles (GBP), non-binding guidelines for green bonds that set global standards. The GBP comprises four key elements:
- Use of funds – funds from the issuance of green bonds must be allocated to so-called green projects, which include, among others: renewable energy, green buildings , clean transport, protection of terrestrial and aquatic biodiversity, energy efficiency, pollution prevention and control, sustainable management of water resources and wastewater, protection of terrestrial and aquatic biodiversity, adaptation to climate change; eco-efficient products and production technologies, and processes and/or adapted to the circular economy;
- Project evaluation and selection process – investors should be informed by the bond issuer about the objectives related to sustainable environmental policy, the processes used by the issuer to classify projects as green (using the above-mentioned categories), the qualification criteria and the method of identifying potential threats that may occur during project implementation;
- Fund management – funds obtained from the issue should be deposited into a sub-account, transferred to a separate portfolio or otherwise monitored by the issuer in an appropriate manner;
- Reporting – It is the responsibility of issuers to collect and disclose information regarding the use of emission funds. This information should be updated annually until the funds are fully allocated, and in a timely manner in the event of significant changes. It is recommended to present generalized information and use qualitative and quantitative indicators, such as reductions in water consumption, energy and electricity generation capacity, and greenhouse gas reduction values.
Within the European Union, from 21 December 2024, Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds and optional disclosure of information on bonds marketed as environmentally sustainable and sustainability-linked bonds (also known as EuGB) will have to be applied.
The purpose of the Regulation is to define uniform requirements for bond issuers who wish to use the "European Green Bond" or "EuGB" label in relation to their bonds made available to investors in the European Union (i.e. admission of the bonds to trading on a trading venue located in the Union or public offering within the Union).
Under the EUGB, green bonds can be issued by financial and non-financial companies, as well as non-corporate entities such as sovereign debt issuers. In practice, this means that green bond issuers can include:
- local government units,
- countries,
- commercial enterprises (e.g. from the construction, energy, fuel industries),
- financial institutions (e.g. banks, investment funds, insurance institutions),
- international financial institutions.
The EUGB requires issuers to allocate all bond proceeds for purposes consistent with the Regulation. By way of derogation, issuers will be allowed to allocate 15% of bond proceeds for business activities, provided that such activities include:
- economic activities in relation to which no technical eligibility criteria have entered into force by the date of issue of the European Green Bond, or
- activities in the context of international support reported in line with internationally agreed guidelines, criteria and reporting cycles, including climate finance reported to the Commission under the UN Framework Convention on Climate Change, in accordance with Article 19(1) of Regulation (EU) 2018/1999, and official development assistance reported to the Development Assistance Committee of the Organisation for Economic Co-operation and Development.
Before issuing a European Green Bond, issuers are required to complete a European Green Bond information sheet, which must then undergo a pre-issue review by an external auditor. The issuance will be permitted after receiving a positive opinion from the auditor. The external auditors will be supervised by ESMA ( European Securities and Markets Authority ).
Issuers of European Green Bonds will be required to prepare a European Green Bond Allocation Report. This report will be prepared every 12 months from the date the proceeds from the European Green Bond are fully allocated and, where applicable, until the capital expenditure plan is completed.
Furthermore, after allocating the bond proceeds, issuers are required to prepare and publicly disclose a European Green Bond Impact Report on the environmental impact of the use of bond proceeds at least once during the term of the green bond. The report may cover more than one European Green Bond issue and should include elements such as the environmental strategy and justification, allocations of bond proceeds, and the environmental impacts of bond proceeds.
In summary, green bonds are financial instruments designed to provide financing for investments related to environmental protection and sustainable development. The obligations imposed on issuers are intended to prevent so-called " greenwashing ," i.e., financing projects that do not have a positive environmental impact, despite being presented as green projects.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of November 25, 2024
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