Green | Finance

How a Bond
Becomes Green

 

Buoyed by investors who want to feel their money is making a positive impact, green bonds have surged in popularity, with global sales reaching $513 billion in 2021. Whether issued by corporations, government entities, or development banks, the bonds are designed to fund environmentally beneficial projects. But they have to show their bona fides first:
By Caleb Mutua and Polly Mosendz
Illustrations by Anna Haifisch
01
Green Bond Framework

Potential issuers, with help from big banks that underwrite the bonds, start by putting together a green bond framework outlining how the proceeds will be used and the impact the bond will have in years to come.

Standard Setters
Principles formulated by the International Capital Market Association (ICMA) guide the global industry, but these voluntary best practices don’t define what qualifies as green. The Climate Bonds Initiative, a U.K. organization, also provides standards for green bond frameworks. Europe pioneered green bonds and dominates the market; last year the European Union proposed its own green bond rules, which would require second-party verification and for projects to meet certain sustainability criteria. Companies have started to use the EU rules even before their approval.

Not all green bonds get a second-party opinion—some go straight from a framework to a roadshow.

02 External Verification
Issuers present their green bond framework to second-party opinion providers for verification. These independent companies review the projects and benefits outlined and assess whether the bond is truly green.

03 The Roadshow
Here comes the sales pitch: Once the bond has been verified, the borrowers meet with potential investors. The meetings, which are held privately, answer investors’ questions about how the bond will be used and what kind of impact it might have. A successful roadshow allows the bond to finally be launched in the primary bond market.

04 The Reporting
Issuers of green bonds, unlike regular bond issuers, are expected to report to investors annually. ICMA recommends detailing the projects to which the proceeds are allocated, the amounts allocated, and their expected impact.
Case Study: Repsol SA
The Spanish refiner raised €500 million (then $559 million) in green bonds in 2017 to help it cut emissions and make its facilities more efficient. About 45% of the bonds were bought by investors with ESG strategies, but the Climate Bonds Initiative excluded the deal from its database, ruling it out of green bond indexes. Last year, Repsol drew up a new framework and raised €1.25 million in so-called sustainability-linked bonds, which can be used for general corporate purposes, unlike green bonds.
Case Study: Ford Motor Co.
The automaker priced $2.5 billion of green bonds in November to help finance its transition to making electric vehicles, the largest-ever offering of its kind from a U.S. corporation. Net proceeds will be used exclusively for the development and manufacturing of EVs and other clean transportation projects. James Rich, a senior portfolio manager at Aegon Asset Management, said the debt was a “strong example of a legitimate green bond.”

05 The Aftermath
With the green bond live on the market and its reporting publicly available, outsiders (such as journalists and investment analysts, including those at Bloomberg) can scrutinize how green, exactly, the bond is. A bond may be stripped of its green leaf in the Bloomberg Terminal.

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