Green, social and sustainability bonds

Labeled bonds: the basic idea

Legally and financially, a green bond works like any other bond: the issuer receives money from investors, pays coupons and repays the face value at maturity. The difference lies in the commitment on the use of proceeds and in the transparency the issuer takes on.

As a rule, the credit risk of a green bond is the issuer's risk, not the risk of the financed project: the investor is paid from the cash flows of the company as a whole. The exceptions are special structures, such as asset-backed bonds or project finance, where payment may depend on specific assets.

Four main types

The first three types are use of proceeds instruments: what matters is what the money is spent on. Sustainability-linked bonds work differently: the money can be used for any general purpose, but the issuer commits to key performance indicators (KPIs) and sustainability performance targets. If the targets are not met, the coupon usually increases.

The ICMA Green Bond Principles

ICMA (International Capital Market Association) publishes the Green Bond Principles, voluntary guidelines widely used in international markets. They are not law, but good practices that increase transparency and investor confidence. The principles have four core components:

1. Use of proceedsProceeds are allocated to eligible green projects, clearly described in the issue documentation, with environmental benefits that are assessed and, where possible, quantified.
2. Process for project evaluation and selectionThe issuer explains its environmental objectives, its eligibility criteria and how it identifies and manages the social and environmental risks of the projects.
3. Management of proceedsThe net proceeds are tracked separately (in a sub-account, sub-portfolio or through an equivalent internal mechanism), and the issuer states how it temporarily invests any amounts not yet allocated.
4. ReportingThe issuer publishes up-to-date information on the use of proceeds, at least annually until full allocation, as well as on the expected impact of the projects.

Eligible project categories

The ICMA principles provide an indicative, non-exhaustive list of green project categories. They include:

• renewable energy (for example, solar or wind farms);
• energy efficiency (building renovation, equipment upgrades, smart grids);
• pollution prevention and control;
• sustainable management of living natural resources and land use (including sustainable agriculture);
• terrestrial and aquatic biodiversity conservation;
• clean transportation (electric, public and non-motorized transport);
• sustainable water and wastewater management;
• climate change adaptation;
• circular economy adapted products, production technologies and processes;
• green buildings certified to recognized standards.

For social bonds, typical categories include affordable basic infrastructure, access to essential services such as healthcare and education, affordable housing, employment generation (including through SME financing), food security and socioeconomic advancement and empowerment.