The use-of-proceeds approach is described in the Green Bond Principles’ definition of a green bond:

“Any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects and assets, and that are aligned with the four core components of the Green Bond Principles.”

Thus, the value of the green projects and assets must be equal to or higher in value than the amount of the bond to be issued. So if a USD100 million green bond is issued, then the issuer needs to have at least USD100 million worth of green projects and assets. Most issuers will include a buffer so they may actually associate USD120 million of green projects and assets with the green bond in this example.

The issuer needs to establish internal mechanisms that allows it to effectively track and allocate proceeds from the labeled bond to eligible projects and assets. These mechanisms are described in the wording of the Green Bond Principles on the topic of management of proceeds:

“The net proceeds of the Green Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner…”

There are two approaches to allocation of proceeds:

Satisfying Green Eligibility Requirements

The eligibility requirements for the issuer’s green projects and assets depend on the set of green definitions, or taxonomy, that the issuer is using. The choice of taxonomy has a major impact on which projects and assets will be “green enough” to be associated with a green bond.

Some of the taxonomies are very prescriptive in what is needed to demonstrate eligibility, but this also depends on the types of projects and assets being considered. For example, for assets such as solar farms, wind farms, or electrified public transport, the green eligibility is based on the core properties of the assets themselves. No further evidence is required beyond their existence and the value ascribed to them in the issuer’s list.

For other assets such as green buildings or hydropower facilities, there is a much broader range of eligibility requirements contained in the various taxonomies. This means that investors will often require more detailed information about projects and assets in these categories, which flows through to the issuer needing to obtain and provide that information. This could include certifications for green buildings or actual performance data if that is the form of an eligibility threshold.

For green definitions that only apply at the high-level, such as the Green Bond Principles, there is much more flexibility for the issuer to define its own green eligibility requirements. Issuers need to ensure that they are transparent on the eligibility of the green projects and assets associated with their green bonds. This may include demonstrating the eligibility of existing projects and assets or defining criteria for new projects and assets.

Investor and Market Expectations

Prior to issuance of the green bond, the issuer’s Green Bond Framework document plays an important role in providing transparency for potential investors on:

• what green projects and assets will be associated with the green bond,
• whether the selected projects and assets are “green enough,” and
• how the issuer will report on these things during the term of the green bond.

After the green bond has been issued, the issuer is expected to prepare an update report at least annually while the green bond remains outstanding and on a timely basis if there are any material developments in the bond’s green label. The update report includes information on the allocation of proceeds, eligibility of green projects and assets, and impact reporting. See Factsheet #11 for further details.

Material developments could include early repayment of the bond; change of control or acquisition; change of name; and changes to the eligibility of assets and projects, as well as any material amendments, supplements, and other updates to deal documents.

The issuer needs to make the update report available to holders of the green bond and is strongly encouraged to make the report available to the public. If the update report cannot be made available to the public, then the green bond may not be aligned with some of the more stringent approaches to identifying green bonds that require public disclosure of annual reports.

Reporting Formats and Channels

Green bond issuers provide their information in a wide variety of formats. Sometimes, the information is included in a broader sustainability report for the organization. Often, the green bond report is provided by the issuer as a separate document.

For new issuers of green bonds, it is good to look at examples of what other issuers have done to understand the level of detail and tone of voice in similar circumstances.

Most green bond issuers provide their green bond documents on a “Sustainability” or “Green Bonds” page on their website. This enables investors to easily access the information on a regular basis. The timing of providing the update report can be aligned with the issuer’s schedule of regular reporting and does not need to follow the anniversary of the issuance of the green bond.

Other channels include various market information providers such as AsianBondsOnline, Environmental Finance, the Climate Bonds Initiative, and stock exchanges.

Issuers are encouraged to make the update reports available through existing reporting channels for the capital markets, such as the issuer’s website, a stock exchange information dissemination portal, or a local green bond platform. This streamlines the information gathering process for investors and analysts, further strengthening the value of the green label and reducing transaction costs.