The initial step for a bond issuer looking to use the green label for the first time is to identify what they can include in their green bond. The most common approach is to identify hard assets that have green credentials, but there is actually a lot of flexibility for what can be counted as green projects, assets, investments, and expenditures.

A variety of projects, assets, activities, refinance, new capital, and relevant expenditures are all eligible to be associated with a green bond. The types of projects, assets, and expenditures that can be included in a green bond include (i) owned projects and assets, (ii) financing arrangements for projects and assets, and (iii) related supporting expenditures

Projects, Assets, and Expenditures Eligible for Inclusion in a Green Bond

GHG = greenhouse gas.
Source: Climate Bonds Standard version 3.0.

Selecting an Appropriate Set of Green Definitions

Once the underlying projects, assets, and expenditures are identified, green bond issuers need to identify which set of green definitions is going to be used for their selection of green projects and assets. There are a few options available and it is important to understand the key considerations for this important choice. Many in the green bond market have adopted the word “taxonomy” to describe a set of green definitions.

ASEAN = Association of Southeast Asian Nations, PRC = People’s Republic of China.
Source: Author’s compilation.

Investors want to see the details of the green projects and assets associated with the bond, but they often do not have the technical background to judge their merits. External reviews of green bonds have provided confidence based on a number of different proprietary approaches and reassuring narratives on green credentials.

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Creating the List

Once the issuer has considered the types of assets, investments, and expenditures that can be used, and has selected an appropriate set of green definitions, a list of green projects and assets can be created by the issuer.

These documents and procedures should align with existing processes and governance structures inside the issuer’s organization. Many existing structures for decision-making and tracking over time can be used. This will minimize the number of new internal procedures and processes that need to be created by the issuer.

Issuers should seek to clarify any related eligibility and exclusion criteria, as well as any other policies or processes by which the issuer identifies and manages perceived social and environmental risks associated with the selected projects and assets.

The issuer’s processes should seek to ensure that the relevant project(s) do not cause significant harm to other environmental and social objectives, and should communicate its analysis, any mitigation measures enacted, and the monitoring to be undertaken where the issuer assesses the potential risks to be meaningful.

Tracking and Information Flows

Many green projects and assets will be eligible just based on what they are. For example, solar or wind power facilities, or electrified transport are all “green enough” based on their role in a green future economy.

Other green projects and assets need to demonstrate their eligibility through performance measures. For example, green commercial buildings or energy efficiency initiatives need to be green enough so that they make a real contribution to achieving a future green economy. Buildings that are slightly cleaner than the average, or small improvements in energy use, are not aligned with what investors want to see in bonds labeled as green.

Sometimes this green performance information is not tracked, or it is not readily available to the green bond issuer. For example, a bank with a loan to a commercial building owner may not receive any green performance information as part of the loan arrangements.

Issuers need to establish processes to track the relevant information for their green projects and assets so that they can demonstrate their green eligibility as well as the relevant impact metrics. This may mean establishing new information flows within the organization or between entities involved with green projects and assets.

Issuers need to ensure that the information flows from relevant sources to the group within the issuer that is responsible for reporting are established and working as intended. This is often more complex within a government or public sector structure compared to corporations, but it is equally important for the integrity of the green label.

Managing the Green Portfolio Over Time

The use-of-proceeds approach requires specific green projects and assets to be associated with the green bond. However, the green projects and assets identified prior to the issuance of the bond may not be available to the issuer or large enough for the full term of the bond.

Additional green projects and assets can be added to—or used to substitute or replenish—the portfolio of green projects and assets associated with the green bond, as long as the additional projects and assets are eligible under the issuer’s green bond framework.

Most issuers of green bonds will regularly update their list of green projects and assets, and then each year disclose the changes in their regular reporting to bond holders.

Issuers of multiple green bonds or other labeled debt instruments can manage their labels on a portfolio basis. This means that multiple green bonds can be “stacked up” and associated with a large pool of green projects and assets. More information on this approach is provided in Factsheet #12.