Green bond principles
Before issuing a true green bond, companies, governments, or institutions must abide by the Green Bond Principles (GBP). The International Capital Market Association (ICMA) established the GBP to provide voluntary guidelines to ensure transparency and integrity were part of the mix. The four core components are:
1. Use of proceeds
This principle ensures that proceeds from a green bond are allocated to green projects, such as solar farms, energy-efficient buildings, or clean water systems. Investors want to know their money is helping the planet, not just funding general business expenses. For example, if a city issues a green bond, the proceeds may be allocated specifically to building electric bus lanes rather than repaving roads.
2. Process for project evaluation and selection
Before issuing a green bond, the organization has to demonstrate how it decides which projects are truly green. With green bonds, an investor would ideally know exactly what they are investing in and its purpose. A company may have an internal team that reviews proposals to ensure they meet the criteria for projects that truly help the environment.
3. Management of proceeds
Once the funds are raised, they must be tracked separately to make sure they're spent properly. It's not ideal for 10% of the funds to be allocated to a dam project and the remaining 90% to be diverted into a polluting project.
Some issuers use dedicated accounts or third-party audits to keep things clean. A solar developer, for example, might open a separate bank account just for bond proceeds used to build new solar farms.
4. Regular reporting
Just as a publicly traded company is required to issue financial statements to its shareholders regularly, green bond issuers should disclose to their bondholders how the proceeds of the bond were spent. This helps build trust and shows the impact of the investment.
You've probably seen an annual letter from a nonprofit organization saying something like, "Thanks to your donation, we planted 10,000 trees." A green bond report might say, "This year, our project avoided 1,200 tons of CO₂ emissions."
Examples of green bonds
Toronto
Toronto has raised more than $1 billion through green bond issuances to fund various environmental projects. This initiative enabled the city to reduce its reliance on federal funding and expedite key infrastructure projects to achieve environmental stability.
