Green Bonds: Meaning, examples and types

Green bond issuance will continue to be supported by climate policies, ESG disclosure regulation and demand from investors.

The issuance of green bonds has been on the rise in recent years, perhaps, due to the increase in extreme weather events, which are multiplying around the world. Investors are interested in making a positive impact and therefore investing and financing projects that help to mitigate the impact of such events.

But let's take a step back and start from the beginning - what are green bonds? Green bonds are debt securities issued by entities or companies which proceeds will be used to finance projects with a positive environmental contribution, such as, for example, renewable energies.

Green bonds are governed by the International Capital Market Association (ICMA) Green Bond Principles which are “voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market”.

 The four principles are:

1. Use of proceeds: The funds will be exclusively allocated to green projects that will have a positive impact on the environment.
2. Process for project evaluation and selection: The issuer of a green bond commits to provide investors with transparent information regarding the environmental sustainability goals of the bond, allowing them to assess and externally review the bond's environmental impact.  
3. Management of proceeds: The management of the funds in question will be overseen and monitored by the issuer, thereby facilitating an independent audit and review.
4. Reporting: It shall be the obligation of the issuer of these bonds to provide regular updates regarding the utilization of funds and the environmental benefits obtained.  

Green bonds can be explained as a project financing mechanism and are widely used for renewable energy projects (solar, wind, hydroelectric, biomass, etc. through, for example, support for the construction and operation of wind farms, solar parks, hydroelectric power stations). But also energy efficiency measures - aimed at reducing energy consumption - the adoption of public, shared and low-carbon transport, as well as projects aimed at conserving and restoring ecosystems, protecting biodiversity, sustainable water management, etc.

The first step in this type of financing was taken by the European Investment Bank, which issued this debt for the first time in 2007. According to the World Economic Forum, this segment of debt grew at a slow pace until 2017. However, after this first decade, the evolution of this type of debt accelerated in line with global initiatives , such as the Paris Agreement - signed at the Climate Conference (COP21) on December 12, 2015 and which came into force on November 4, 2016 and contains an action plan aimed at limiting global warming - and the United Nations Sustainable Development Goals - aimed at eradicating extreme poverty and hunger.

In recent years, several companies from many different industrial sectors - including those in the utilities sector, but also financial institutions and countries, such as Brazil, which issued sustainable debt in 2023 with the aim of halting deforestation in the Amazon (around 60% of the Amazon rainforest is in Brazilian territory) have accessed the green bond market to fund green projects.

Data compiled by Bloomberg shows (and revealed in February 2024) that sustainable debt issuance increased significantly in 2023. With regard to green bonds, the agency's data indicates that 575 billion dollars in debt was issued by companies and governments, representing a record figure.

And the outlook for 2024 is encouraging, with a report by S&P Global Market Intelligence, predicting a strong year for debt issuance thanks to forecasts of interest rate cuts by the central banks of the US (US Federal Reserve) and the Eurozone (European Central Bank), thus generating favorable market conditions for both issuers and investors.

In addition, the new European guidelines could also be important for the issuance of these bonds. In October 2023, the European Council adopted a regulation establishing a standard for European green bonds. This regulation was published at the end of 2023 in the Official Journal of the European Union and came into force at the end of 2024. The Council explains that “the regulation lays down uniform requirements for issuers of bonds that wish to use the designation 'European green bond' or 'EuGB' for their environmentally sustainable bonds.