Green Bond Principles: Contributing to Sustainability

As reported last month by gtnews, a new version of the GBP was recently released.

The Principles are issued by the GBP Executive Committee, whose members comprise representatives from various investors, issuers and underwriters. They are supported by the International Capital Markets Association (ICMA), which serves as secretariat to the GBP.

The GBP themselves were developed as voluntary guidelines designed to help clarify the approach to issuing ‘green bonds’ – so-called as they aim to encourage a more sustainable society and environmentally-friendly projects such as the redevelopment of brownfield sites. The ICMA says that they recommend transparency and disclosure, while promoting integrity in the development of the green bond market.

The GBP were originally issued in January 2014, and after consultation with a wide range of market participants an updated 2015 edition of the GBP was published last month. These updates, and the challenges that the green bond market faces, were discussed at an event held at the European Bank of Reconstruction and Development (EBRD) in London last week.

Pillars of Green

The GBP were established on four key pillars, and these remain in place following the 2015 update. These pillars are:

  1.  Use of proceeds.
  2.  Process for project evaluation and selection.
  3.  Management of proceeds.
  4.  Reporting.

Use of proceeds:
The projects that green bond proceeds are used for should, of course, provide clear environmentally-sustainable benefits. The GBP suggests several broad categories of potentially eligible green projects that include, but are not limited to:

  •  Renewable energy.
  •  Energy efficiency (including efficient buildings).
  •  Sustainable waste management.
  •  Sustainable land use (including sustainable forestry and agriculture).
  •  Biodiversity conservation.
  •  Clean transportation.
  •  Sustainable water management (including clean and/or drinkable water).
  •  Climate change adaptation.

Climate change adaptation is a new category for the 2015 version of the GBP. In addition, sustainable water management is a clarification to the headline for the water category, moving it beyond purely drinking water.

Process for project evaluation and selection:
The GBP recommend that green bond issuers outline the decision making process used to determine the eligibility of projects using green bond proceeds. This includes describing the process used to determine how the project fits into the green projects categories, the criteria that makes the project eligible to use green bond proceeds, and the project’s environmental sustainability objectives.

Management of proceeds:
On managing the proceeds, the GBP say that net proceeds from green bonds should be tracked by the issuer – such as through being credited to a sub-account or moved to a sub-portfolio – and affirmed by a formal internal process linked to that issuer’s lending and investment operations for green projects.

The GBP state that as long as green bonds are outstanding, the balance of the tracked proceeds should be periodically reduced by amounts matching eligible green investments or loan disbursements made during that period. If such investments or disbursements are still in the pipeline, the GBP recommend issuers share with investors the intended types of temporary investment instruments for the balance of unallocated proceeds.

The GBP say that issuers should provide a list of projects that green bonds have been allocated to at least once a year. It advises that this should cover the amounts disbursed and the expected environmentally sustainable impact, provided that confidentiality or competitive concerns allow. Specifically, the GBP recommend qualitative and, where possible, quantitative performance measures of the impact on environmental sustainability. This could, for example, be the reduction in greenhouse gas emissions or the number of people given access to clean energy.

2015 Changes

At the London event Nicholas Pfaff, senior director at the ICMA, described the 2015 update of the GBP as an evolution, not a revolution, outlining that the four pillars still stand.

In the debate about how prescriptive the GBP should be, Pfaff pointed out that it still provides voluntary recommendations, not regulations, but that some of these are especially encouraged. For example, there is a strong emphasis on the necessary transparency, accuracy and integrity of environmentally sustainable information reported by issuers to stakeholders.

To complement the existing green project categories mentioned in the GBP, the 2015 update includes the following four key areas of concern: climate change; natural resources depletion; biodiversity conservation and/or pollution.

Pfaff also noted that there had been discussion about the standard of second party opinions about assurance. The 2015 update includes a general recommendation to issuers to use external assurance to confirm that they are aligned with the key features of green bonds.

In terms of what a green bond actually is, the 2015 update includes a high level definition of green bonds as “any type of bond instruments where the proceeds will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible green projects and which follows the four green bond principles.”

The revised GBP also clarifies that refinancing can be combined with financing, with issuers advised to provide an estimate of the share between the two. In terms of assurance, the GBP now recommends independent verification or audit for the internal tracking method and the allocation of funds from proceeds. Finally, the GBP welcomes initiatives that help establish a model for impact reporting that others can adopt and/or adapt to their needs.


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Mark Carney Bank of England