The early years of the green bond market saw a lot of issuers use “self-labeling.” This was accepted by many investors because at that time all green bond issuers were either multilateral development banks or other very trusted entities.

As the diversity of green bond issuers grew, investors wanted to have more confidence that the green claims being made by the issuer were valid. The investors also recognized the value of having an expert provide an opinion when the investor’s own green understanding was limited.

In today’s green bond market, there are still a few entities who use self-labeling, but this number is shrinking.

The vast majority of green bonds have an external review prior to issuance. A smaller number of issuers have an external review after the issuance but this trend is increasing.

External reviewers are essentially providing an audit function, but the focus is not like we see in financial auditing.

Sharing Information with the External Reviewer

The external reviewer needs the issuer to provide relevant information. Often the external reviewer will have template information requests that it uses at various stages of the process.

This first occurs during the engagement process, where the external reviewer needs to understand the issuer’s situation and green bond plans so that they can prepare a quote and expected timeline for the engagement contract. Usually, it involves the issuer providing a draft green bond framework document and some supporting information.

During the external review, the issuer will then need to provide a more formalized package of information to support the statements in its green bond framework and to demonstrate green eligibility.

External Review Procedures

External reviewers use a variety of procedures to understand the situation and arrive at an opinion. The actual procedures used range from formal information requests to telephone interviews, use of external data sources, site visits, and clarification requests.

Generally the pre-issuance external review process follows these steps:

Draft Reports and Close-Out Processes

External reviewer will provide a draft report when they have completed the main body of assessment work. The draft report will highlight any gaps that still need to be filled and provide a preliminary opinion.

The issuer needs to respond to the report, clarify any remaining topics, and then confirm that they want the report finalized, usually in a close-out meeting with the external reviewer.

The external reviewer will often have internal processes and quality control that will be part of moving from the draft report to the final opinion and report.

Form and Use of Final Reports

The report from the external reviewer is seen as a key component of any green bond offering, along with the issuer’s green bond framework document.

Often the draft report provided to the issuer will have much more detail than a cut-down report that can be used by the issuer for its green bond marketing and then be published after the issuance of the bond.

The final report and opinion are sometimes very brief (e.g., a few pages) even though there has been a lot of work completed to reach that final opinion.