A green bond is fixed-income debt instrument where the proceeds of this bond are used to finance positive environmental impact projects.
The structure of a green bond are similar to that of a ‘traditional’ bond in structure, risk and return. However, while a ‘traditional’ bond can be used to finance a project of the issuer’s choice, the capital raised through the listing of a green bond must fund clean energy, energy efficiency, low carbon transport, smart grid, agriculture & forestry, natural resource mitigation or other environmentally conscious projects.
In terms of reporting, auditing and allocation of proceeds, green bonds are very different and more rigid when compared to traditional bonds. While these additional requirements may be more stringent, they also mean that green bonds possess a higher marketing and branding value that issuers can use to attract further investment and exposure.
The issuer of a green bond is required to provide a description of projects that will be funded through the financial investment in the bond at the time of issuance and must ensure segregation of project funds along with post-project reporting or verification about how the funds were used.
Green bonds are usually used fund large-scale, capital-intensive green infrastructure projects with a steady, modest, long-term repayment agreement. Green bonds offer an exciting opportunity for both investors and issuers to encourage sustainable growth while setting a good example for other members of the investment community. Green Bonds also provide municipalities with an ideal opportunity to develop Public-Private-
Partnerships to accelerate the advancement of new technologies and energy efficiency.