Definition
Green bonds describe fixed-income financial instruments that fund environmental improvements or projects. The Green Bond Principles, a guidance document crafted by a coalition of key stakeholder banks, describes green bonds as
“… instruments in which the proceeds will be exclusively applied (either by specifying Use of Proceeds, Direct Project Exposure, or Securitization) towards new and existing Green Projects – defined here as projects and activities that promote climate or other environmental sustainability purposes.”
- Green bonds are often identical in structure, risk, and return to traditional bonds, except that capital raised from a green bond funds clean energy, energy efficiency, low carbon transport, smart grid, agriculture & forestry, natural resource mitigation or similar projects/ initiatives/ programs.
- Green bonds are marketed as “green” at the time of issuance. Issuers are expected to provide a description of projects to be funded at the time of issuance, ensure segregation of project funds, and provide post-project reporting or verification about how the funds were used.
- Green bonds typically fund large-scale, capital-intensive green infrastructure projects such as energy efficiency projects, transit, or renewable power, among others, that can be repaid from steady, modest, long-term cash flows.