All of the principles and guidelines for labeling a green bond include strong recommendations that issuers engage an external reviewer to provide an opinion on the green label. In many jurisdictions it is mandatory for green labels to be accompanied by an opinion from an external reviewer.

The most comprehensive list of external reviewers is provided by the Climate Bonds Initiative, which has an approved verifier program to ensure the quality of the service providers. There is also a list available from the Green Bond Principles website.

Scoping Out What You Need

There are four different external review products that are used in the green bond market. The most common approach is a second party opinion (or “second opinion”) but there is strong growth in certification approaches that rely on national, regional, or international standards or guidelines.

Most external reviewer providers will offer multiple types of external review so it is up to the issuer to choose which is the most appropriate for their situation.

The type of external review selected by the green bond issuer will depend on a few key considerations:

• Jurisdiction of issuance. Are there regulations or guidelines that specify what type of external review must be used?
• Investor preference. Some investors have very strong preferences for what type of external review is undertaken. Do the target investors have these preferences?
• Best practice narrative. Is the issuer claiming they are using best practice in formulating their green bond? If so, then certification or strong second party opinion tracks are more aligned with those claims.

Source: Author’s compilation

Engagement Contracts

The external reviewer is traditionally engaged (contracted) by the green bond issuer, although this is not always the case. Sometimes, a different entity involved in the green bond transaction may have an easier pathway to engaging a service provider.

For example, in the United States’ municipal bond market, the issuer is restricted by regulations on what can be included in the transaction costs for the bond issuance. In this case, the arranging bank or securities firm supporting the issuance could engage the external reviewer.

The contract with the external reviewer should specify the following:

• scope of the work;
• form of the opinion being provided, including any formal alignment or conformance with Green Bond Principles, Association of Southeast Asian Nations (ASEAN) Green Bond Standards, or Climate Bond Standards
• expected timeline for the work;
• approach being used by the external reviewer to formulate its opinion, including any standards or other professional services codes of conduct;
• obligations of each party to provide information and undertake the assessment; and
• expected use of the external reviewer’s report.

Best practice is to have a single engagement contract that covers the pre-issuance activities as well as the post-issuance assessment.

The external reviewer will often ask to see draft versions of the issuer’s key documents before they can determine their level of effort and, hence, the price for the engagement.

Pre-Issuance and Post-Issuance Assessments

Best practice entails having an external review prior to the issuance of the green bond and at least one external review after the green bond has been issued.

Pre-Issuance external review involves the assessment and confirmation of the bond issuer’s green bond framework and internal processes, including the:

• selection process for projects and assets,
• systems for internal tracking of proceeds,
• allocation system for funds, and
• reporting arrangements.

This results in an external reviewer’s report that can be provided to potential investors and other stakeholders prior to the issuance of the green bond.

A public version of the external reviewer’s report is often disclosed to the public after the bond has been issued, usually via the issuer’s website. This disclosure of the external reviewer’s report is also a key requirement for many market information and index providers.

Post-Issuance external review involves the assessment and confirmation of the green bond’s label, which must be undertaken after the allocation of bond proceeds is underway.

The external reviewer undertakes procedures so that it can provide confirmation that the issuer and the bond actually meet all of the nominated requirements (e.g., Green Bond Principles, ASEAN Green Bond Standard, or Climate Bonds Standard, among others).

The post-issuance external review process is focused on:

• confirming that the green bond that has actually been issued is in line with the green bond framework provided prior to issuance;
• confirming that the internal processes examined during the pre-issuance external review are working as expected;
• examining the allocations of net proceeds that have been made so far and the information provided on eligibility (and impacts) for those projects and assets; and
• assessing any update reports that have been provided by the issuer, or the internal processes to generate those reports.

The external reviewer provides a finalized report to the issuer, who then provides the report to the bond holders and other stakeholders, such as regulators or certification systems, as part of their regular reporting and disclosure on the green bond.

Pricing and Timing Expectations

Most green bond issuers describe the costs of the external reviewer as low compared to the other transaction costs associated with issuing a bond such as credit ratings, legal support, investor road shows, and lead manager fees.

However, the timeline for external review is a major consideration for the issuer’s approach to raising capital via a bond issuance. Some lead time needs to be built into the issuer’s timeline for going to market with the bond offering. Six weeks is a common timeframe for an external review to go from contracting to delivery of the final report.

There are three key considerations that determine the timing and costs of the external review for a green bond label:

Many jurisdictions are offering support to issuers who engage external reviewers. These come in the forms of capped subsidies or other contributions and are currently in place in a number of ASEAN countries. For the comparison of Green Bond Grant Schemes, please see the "Green Bonds for Financing Renewable Energy and Energy Efficiency in Southeast Asia: A Review of Policies.” by Azhgaliyeva, D., A. Kapoor, and Y. Liu. 2020. ADBI Working Paper 1073, page 20. Tokyo: Asian Development Bank Institute. Available at here.