How do Green and Social Bonds work?

Green and Social Bonds play a key role in the effort to fund projects that provide environmental benefits or support positive social developments.

Funding green projects

Green Bonds are debt instruments that allow investors to invest in sustainable projects while offering issuers affordable funding to finance these projects. The proceeds raised through the issuance of Green Bonds are used exclusively for projects that have a positive impact on the environment. The financial industry has agreed on standards that define which projects are considered “green”. Through its Green Bond Principles the International Capital Markets Association (ICMA) has created voluntary process guidelines for Green Bond issuers. Projects funded through Green Bonds can belong to various categories, including renewable energy, pollution prevention and energy efficiency.

Verification of the use of proceeds and its environmental impact by specialised independent parties such as CICERO, oekom or Sustainalytics is often used to provide additional comfort to investors in Green Bonds. Regular reporting by the issuer about the projects funded through the issuance of Green Bonds allows the investor to track the environmental impact of the investment.

Social and Sustainability Bonds

Social Bonds work in a similar fashion to Green Bonds with the main difference that the proceeds are used for projects that have a positive social outcome. Examples of projects funded through Social Bonds include affordable housing, access to essential services like healthcare and education as well as affordable basic infrastructure such as clean drinking water. Bonds that fund a combination of green and social projects are known as Sustainability Bonds. ICMA has released Social Bond Principles and Sustainability Bond Guidelines for issuers of these bonds.

 


A diversified investor base

Investors in Green and Social Bonds range from global institutional investors with dedicated portfolios for sustainable investments to smaller local investors. The fact that Green and Social Bonds can be found throughout the whole bond spectrum, ranging from government bonds to asset backed securities highlights the level of diversification of the investor base.

The planned introduction of EU wide Green Bond standards by the European Commission is likely to be a significant catalyst for the growth of the investor base in the coming years. Standardisation and EU wide recognition of Green Bonds could be an essential step in the development of the asset class into one of the key pillars of debt capital markets.