Use of Green Bonds to Promote Green Projects

Introduction

“Green bonds are a type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects” (International Capital Market Association [ICMA], 2021, p.3). Green bonds make it possible to finance the shift to a low-carbon economy and spread out the cost of combating climate change across many generations (Flaherty et al., 2017; Monasterolo & Raberto, 2018). Bond instruments are fixed-income securities in the sense that they provide investors the principal amount they invested in an organization or a project, plus fixed interest payments until the maturity date depending on the type of the loan terms. Just like conventional bonds, investors lend their money to the government, and in return green bonds provide investors fixed income of interest and return. Green bonds are attractive to investors for two primary reasons;

• •

  Investors and society as a whole have become more conscious of the effects that investment choices have on society and the environment, and demand for investment alternatives that provide not only high financial returns but also positive environmental consequences has risen (Imberg et al., 2019).

• •

  Institutional investors choose to include green bonds in their investment portfolios to raise their environmental, social, and governance (ESG) ratings.

This chapter aims to provide an overlook of green bonds used frequently to finance projects with sustainability and environmental benefits. The concept will be explained by focusing on types of green bonds, principles, rules, and regulations set by the International Capital Market Association (ICMA), and external reviewers on green bond markets and pricing.

Background

Green bonds offer an alternative financing source for green projects. Environmentally sound initiatives or businesses that consider a green transformation mostly obtain the necessary funds from issuing green bonds (Azhgaliyeva et al., 2020; Banga, 2018). Therefore, green bonds enable large investors such as mutual funds, sovereign wealth funds, insurance companies and pension funds to invest sustainably (Akhtaruzzaman et al., 2022). In 2008, the World Bank issued the first green bond. The Intergovernmental Panel on Climate Change initiated the process in 2007. After the panel, some managers of Swedish pension funds reached out to World Bank wanting to invest in initiatives that assist the environment but unsure of which initiatives were truly green. The group collaborated with the World Bank and Norway's Center for International Climate Research, and the first official green bond was issued in 2008 (National Academies Sciences Engineering Medicine [NASEM], 2021). Currently, corporations, municipalities, public sector organizations, and supranational institutions are the primary green bond issuers (Jiang et al., 2022).

The inaugural edition of the Green Bond Principles (GBP), which is optional guidelines for green bond issuers, was released by the International Capital Market Association (ICMA) in 2014. Since giving false information and greenwashing is a great concern, it is essential to standardize which project metrics should be used to label a project as green, and how the measurement and reporting will be conducted. According to ICMA, green bond issuers should create an annual report that includes a concise summary of the projects to which proceeds from the bonds are going, how much is going there, and what the impact will be. GBP underlines the fact that reporting should be up-to-date, transparent, and informative. To be transparent, issuers are advised to get consultancy from a third party or an internal auditor (ICMA, 2021). All of this information is also advised to be disclosed in the voluntary nonfinancial disclosures attached to the green bond by the issuer organization.