In response to the escalating threats of climate change on energy, food supplies, and water resources, governments are increasingly compelled to construct resilient structures and infrastructures. This urgency has driven collaboration between governments and the private sector, including institutional investors, leveraging innovative funding options and issuing of sustainable securities – green bonds, blue bonds, etc., for infrastructure development. These efforts aim to bolster energy, food security, and clean water supply.
Continuing from our previous discussion on sustainable finance, this article focuses on green bonds, including the principles guiding the green bond market, the benefits they offer, amongst other relevant subject matters.
Introducing Green Bonds
Green bonds are debt securities whose proceeds are dedicated to financing projects, assets, and expenditures with environmental and/or climate related benefits. They are also strategically positioned to amplify the crucial roles that debt markets can play in funding projects dedicated to advancing environmental sustainability.
Green Bonds Principles
The Green Bond Principles (GBP) are voluntary guidelines set out by the International Capital Markets Association (ICMA) to promote transparency, disclosure, integrity, and robust reporting within the evolving green bond market. These principles outline the issuance for green bonds, offer vital guidance to market participants, and aid in providing essential information increase capital allocation towards environmentally sustainable projects.
The GBP, as of 2021, incorporates four (4) core components, in line with updated guidelines and definitions for external reviews specified in the “Guidelines for Green, Social, and Sustainability Bond External Review”. The four (4) core components are detailed below:
▪ Use of Proceeds
▪ Process for Project Evaluation and Selection
▪ Management of Proceeds
▪ Reporting
Use of Green Bonds Proceeds
Proceeds from green bonds are exclusively directed to finance or refinance green projects, spanning renewable energy initiatives, energy efficiency improvements, sustainable waste management, clean transportation, and climate change adaptation efforts. By allocating funds to such projects, green bonds play a pivotal role in mitigating environmental impact and fostering sustainable development. Green bonds find application across diverse entities, including governments, municipalities, corporates, and financial institutions. Governments may issue green bonds to fund national renewable energy initiatives, while corporates utilise them for sustainable infrastructure projects. Financial institutions often serve a critical role by underwriting and distributing green bonds, facilitating capital flow to green projects.
Process for Project Evaluation and Selection
The meticulous evaluation and selection of projects financed by green bonds are integral to upholding their environmental integrity. Issuers undergo rigorous assessments to ensure alignment with established green criteria, such as the Climate Bonds Standard or other internationally recognised frameworks. This evaluation scrutinises the environmental impact and mitigation of potential risks associated with the projects.
Issuers of green bonds should Clearly articulate and communicate to investors, the environmental sustainability objectives, process in determining how the projects fits within the eligible Green Project categories, and the related eligibility criteria, including process applied to identify and manage potential environmental and social risks associated with the projects.
Management of Proceeds
Preserving the integrity of green bonds hinges on effective management of proceeds. Issuers are tasked with segregating and tracking fund usage, ensuring exclusive allocation to eligible green projects. This oversight is crucial for maintaining investor confidence and upholding transparency and accountability principles inherent in green bond issuance.
The GBP encourages a high level of transparency and recommend than issues’ management of proceeds be supplemented by the use of an auditor, or other third party, to verify the internal tracking methos and the allocation of funds from the green bond proceeds.
Reporting
Transparency and disclosure are foundational in the Green Bond market. Issuers are expected to provide regular reporting on the allocation and impact of proceeds, offering investors insights into the environmental performance of the funded projects. Comprehensive reporting mechanisms enhance market confidence and allow stakeholders to monitor the contribution of green bonds to sustainable development objectives.
The GBP recommend the use of qualitative performance indicators and where feasible quantitative performance measures and disclosure of the key underlying methodology and/or assumptions used in the quantitative determination, issuers with the ability to monitor achieved impacts are encouraged to include those in their regular reporting.
Benefits of Green Bonds
Green bonds offer several benefits, which contribute to their growing popularity as a financial instrument for funding environmentally friendly projects. Below are some of the core benefits of green bonds:
▪ Environmental Impact: Green bonds are specifically earmarked to finance projects with positive environmental outcomes, such as renewable energy, energy efficiency, sustainable water management, and climate change adaptation. By directing capital to these projects, green bonds help to mitigate environmental damage and promote sustainable development
▪ Access to Capital: Green bonds provides issuers, such as governments, corporates, or financial institutions, with access to a new and growing investor base that specifically seeks to support environmentally friendly initiatives. This expanded investor base can lead to lower financing costs, helping to fund green projects more effectively
▪ Transparency and Credibility: The strict standard of transparency green bonds is subjected to, enhances the credibility of the issuer and the market, providing assurance to investors that their funds are being used for their intended purpose
▪ Market Development: The issuance of green bonds contributes to the development of the broader sustainable finance market. By creating a specific asset class for environmentally friendly projects, green bonds help to stimulate innovation and investment in sustainability, driving the transition to a low-carbon and more sustainable economy
Conclusion
In the ongoing global push for sustainable finance, green bonds shine as a guiding light, aligning capital markets with environmental goals. In Nigeria, the adoption of green bonds marks a significant change, showcasing a new approach to nurturing economic growth alongside environmental care. Despite challenges, the strict adherence to GBP, transparent reporting, and thorough project selection processes makes them powerful instruments in pursuing sustainable development goals. The next and concluding article of this series will further highlight Nigeria’s progression in this path, showcasing the country’s dedication to a future where financial innovation and environmental responsibility go hand in hand, leaving a legacy for future generations.
