These are the principles of the Green Bond to provide guidance to issuers on the key components.
The green bond markets are starting to play an increasingly more important role within the debt issuance market, where projects that commit to environmental sustainability are funded against more favourable terms than conventional, non-sustainable, projects. The Green Bond Principles (GBP) are designed to guide the green bond market with regards to transparency, disclosure, and reporting, promoting the integrity of the market in the process.
Green Bond Principles provide guidance to issuers on the key components needed to issue a green bond. Issuers who intend to launch a green bond are required to build a Green Bond Framework, which should align to the following four components as specified under the Green Bond Principles.
1. Use of Proceeds
The biggest component of the green bond principles is the use of the proceeds to fund solely green projects which provide clear environmental benefits (think about energy-efficient buildings, renewable energy, and circular economy products). This can be done by both financing new assets, or redeveloping non-green assets into green products.
2. Process for Project Evaluation and Selection
The issuer should clearly state what their sustainability objectives are. Like denoting the maximum energy-consumption per square meter per year for certain building types, or what sustainability certificates are important and why those are specifically selected. Also, eligibility criteria and processes used to identify and manage both potential social and environmental risks associated with the projects should be clear to investors.
The GBP aim to supply a high level of transparency across the green bond market, recommending that the issuer’s process for project evaluation and selection is reviewed by an external party.
3. Management of Proceeds
The net proceeds of the Green Bond should be transferred to a sub account, or tracked by the issuer in another suitable way. After which it should be linked to the issuers investment operations for green projects in an internal process, to ensure the goals are being upheld.
Assets should be constantly monitored, and replaced if they are no longer suitable to be part of the Green Bond. Small net proceeds can be temporarily placed in less green assets, this should however always be made know by the issuer to the investors. Also, management of proceeds states that the portfolio of green buildings should cover all outstanding issues.
Green bond reporting should be done on an annual basis regarding the allocation of proceeds into sustainable products and projects. Focussing on the Framework used by the Green Bond issuer. This consists of a breakdown of the asset pool, showing the percentage of certain certificates and asset classes in the portfolio. It should also provide investors with a brief description of all assets included in the portfolio. Complementary to this, the issuer may decide to also report on the environmental impact of the overall green bond.
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