The issuer of a green bond or other labeled debt instrument needs to establish and maintain internal processes and controls. These need to enable the issuer to reliably undertake procedures and make decisions on the selection of green projects and assets, management of green bond proceeds, and reporting.

A summary of the issuer’s approach needs to be provided in its Green Bond Framework; the issuer also needs to develop internal procedures that guide the actions and decisions of the issuer. The external reviewer will assess the issuer’s internal controls and processes as part of the external review process.

Leveraging Existing Arrangements

The actual extent of internal controls and processes for the green bond will depend on the issuer’s organization and the existing complexity around information flows and decision making. For example, a pure-play solar power company is likely to have simple procedures, while a government issuer may have quite complex information flows and decision-making structures to support its green bond or sustainable finance transactions.

Most issuers of green bonds already have comprehensive internal controls and processes for making investment decisions, tracking funds within the business, and signing off on external statements. The key requirements for green bonds can be met by using or adjusting the existing arrangements within the issuer organization.

Creating New Groups and Conversations

While many existing arrangements can be leveraged, the information required for eligibility of the green projects and assets may represent new arrangements for sourcing and compiling information as well as requiring new groups to be formed. Many supporters of green bonds have highlighted these new groups and conversations within the issuer as being one of the most valuable outcomes from the effort to use the green label. They provide new channels for discussion and improved understanding of green opportunities and risks across the issuer’s organization.

For example, many issuers will set up a green selection committee consisting of senior members of staff from relevant departments (e.g., finance, engineering, and operations). The committee is tasked with screening the underlying projects and assets according to the green definitions and criteria being used. The committee provides recommendations for the selection of projects and assets that is then confirmed (i.e., “signed off”) by the issuer’s relevant decision-making body or key person.

Similarly, sovereign issuers of green bonds often describe their newly created governance processes for the selection of green projects and assets. For example, relevant projects and assets are screened by a joint committee consisting of representatives of the Ministry of Finance, Ministry of Environment, Ministry of Transport, and other relevant ministries. Selection decisions are then sent to an appropriate body or government minister for formal approval.

Documentation of Procedures

While each issuer might have a different way of selecting green projects and assets, or of managing the proceeds from the green bond, the key point is that the issuer should be as transparent as possible to provide investors with comfort that the issuer’s internal processes and controls are robust.

The internal processes and controls that the issuer uses for its green bond need to be documented. These need to include the following:

Decision-Making, Disclosure, and Governance

Labeling a bond as green (or any other label) requires the issuer to make decisions, disclose to investors and the public, and provide confidence that the label is robust.

Most issuers of green bonds already have these capabilities internally based on their existing business or public sector operations. These should be used as much as possible by the issuer.

Investors and market players want to have confidence that these aspects of the issuer’s green bond offering are robust and transparent, even if they are not often interested in the details. External reviewers will assess the issuer’s internal processes and controls as part of their review procedures. See Factsheets 7 and 8 for further details.