Green Bond Development Funding

What is Green Bond Development Funding?

“Green Bond Development Funding is a securitized syndicated fixed income offering in the bond market, where the use of development funds raised is dedicated to the Green Bond Principles of doing environmental and social good, resulting in a sustainable growing economy as envisioned by the United Nations 17 sustainable development goals (SDG).  These Green Bonds are also identified as Climate Bonds.”
The features of these green bonds are listed below:

 

Syndicated Fixed Income Offering:

A syndicated bond offering is a public offering usually sold to larger institutions that have a need for longer term investments where the premium on the bond (its interest rate) is fixed for several years.  These are contracted financial commitments where the returns are promised before the investment is made rather than based on the value of equity positions in the stock market, where the investment return is much more volatile.

The way the “economic aspect” of the investment is evaluated is by the strength of the revenue generating machine behind the instrument.  That business revenue model is expected to show a continuity net revenue stream that supports a sustainable economic business model that most any MBA can evaluate as being a sound prospect for regular income.

The revenue model is not based on the fiat value of the business (as in the stock market) but on the net revenue generating capacity of the business necessary to support payment of the premiums on the bond and retire the bond when it is due.  This is the principle or first consideration of the investors.  They are looking for a fixed return on their capital and then to get their original investment returned to them in the end.

What distinguishes a Green Bond from the rest of the bond marketplace, which requires only economic viability, is the Use of Funds.

Green Bond Development Use of Funds:

You can not just say the bond is “green” and expect it to pass muster.  The days of green washing are over.  You must prove it is “green”.

There are internationally recognized guidelines or principles, known as green bond principles that have been established by organizations.  Having you bond certified under these principles makes the bond more market ready to be sold to those investors that want their money to do good. Below are the principles and the organizations that set up the guidelines.

Zero Emit Green Bond Certified
International Capital Market Association
The ICMA set up green principles as a way of identifying the characteristics of business behavior and the projects those businesses do to qualify themselves as a green financing vehicle recipient.  The Green Bond Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond.

Green Bond Principles
These principles lead to funding projects that contribute to environmental sustainability.  This is important to understand because it marks a departure from traditional investing that focuses on business viability and instead focuses on the projects the businesses do.  This kind of green bond development investing has its “why statement” based on the outcomes that result from doing projects with environmentally responsible intentions.  Below are the principles.

There are four core components involved in the Green Bond Principles, GBP:
1. Use of Proceeds
2. Process for Project Evaluation and Selection
3. Management of Proceeds
4. Reporting

1.  Use of Proceeds
The GBP explicitly recognize several broad categories of eligibility for Green Projects, which contribute to environmental objectives such as: climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control.

The eligible Green Project categories, listed in no specific order, include, but are not limited to:

  • renewable energy (including production, transmission, appliances and products);
  • energy efficiency (such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances and products);
  • pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy/emission-efficient waste to energy);
  • environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart farm inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally-sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes);
  • terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine and watershed environments);
  • clean transportation (such as electric, hybrid, public, rail, non-motorised, multi-modal transportation, infrastructure for clean energy vehicles and reduction of harmful emissions);
  • sustainable water and wastewater management (including sustainable infrastructure for clean and/or drinking water, wastewater treatment, sustainable urban drainage systems and river training and other forms of flooding mitigation);
  • climate change adaptation (including information support systems, such as climate observation and early warning systems);
  • eco-efficient and/or circular economy adapted products, production technologies and processes (such as development and introduction of environmentally sustainable products, with an eco-label or environmental certification, resource-efficient packaging and distribution);
  • green buildings which meet regional, national or internationally recognized standards or certifications.

These Green Bond development funding principles are not designed to define which projects should or should not be done but rather provide general guidance on on environmental, social and sustainable projects that benefit those within the community where the work is done while not ignoring the environmental conservative benefits.

2.  Process for Project Evaluation and Selection
The issuer of a Green Bond should clearly communicate to investors:

  • the environmental sustainability objectives;
  • the process by which the issuer determines how the projects fit within the eligible Green Projects categories identified above;
  • the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental and social risks associated with the projects.

Issuers are encouraged to position this information within the context of the issuer’s overarching objectives, strategy, policy and/or processes relating to environmental sustainability.  Issuers are also encouraged to disclose any green standards or certifications referenced in project selection.

The GBP encourage a high level of transparency and recommend that an issuer’s process for project evaluation and selection be supplemented by an external review (see External Review section).

All of Zero Emit’s Green Bond Development Funding seeks certification via external review.

3.  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, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for Green Projects.

So long as the Green Bond is outstanding, the balance of the tracked net proceeds should be periodically adjusted to match allocations to eligible Green Projects made during that period.  The issuer should make known to investors the intended types of temporary placement for the balance of unallocated net proceeds.

The GBP encourage a high level of transparency and recommend that an issuer’s management of proceeds be supplemented by the use of an auditor, or other third party, to verify the internal tracking method and the allocation of funds from the Green Bond proceeds (see External Review section).

4. Reporting
Issuers should make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in case of material developments.  The annual report should include a list of the green bond development funding projects to which Green Bond proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact.  Where confidentiality agreements, competitive considerations, or a large number of underlying projects limit the amount of detail that can be made available, the GBP recommend that information is presented in generic terms or on an aggregated portfolio basis (e.g. percentage allocated to certain project categories).

Transparency is of particular value in communicating the expected impact of projects.  The GBP recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures (e.g. energy capacity, electricity generation, greenhouse gas emissions reduced/avoided, number of people provided with access to clean power, decrease in water use, reduction in the number of cars required, etc.), and disclosure of the key underlying methodology and/or assumptions used in the quantitative determination.  Issuers with the ability to monitor achieved impacts are encouraged to include those in their regular reporting.
The green bond material above is borrowed from Green Bond Principles.

International Finance Corporation
International Finance Corporation
A private sector stimulus division of the World Bank Group, the IMF has published green bond guidance.  Several Sustainable Banking Network members, an informal and exclusive group of banking regulators and associations that are interested in sustainable banking, have released national sustainable finance policies and principles that address two key themes, namely (i) integrating environmental, social and governance (ESG) factors into financial sector investment, lending and insurance operations; and (ii) increasing capital flows to green projects and assets.

These recommendations, based on extensive consultation, that form a Green Bond Market Development Toolkit for SBN members, including:
(1)  a set of Common Objectives;
(2)  a Self-Assessment and Planning Matrix;
(3)  a Roadmap with Common Milestones;
(4)  a Capacity Building Needs Assessment with a mapping of existing international resources.

This guidance performs the following functions:
i)  aligning local green bond issuance with national climate and infrastructure targets, thus contributing to the country’s sustainable development agenda;
ii)  maintaining market integrity by ensuring high standards of transparency, independent review, ESG risk management, and ongoing monitoring and reporting;
iii)  enabling targeted policy support for low-carbon and green bond issuance by clarifying what categories and types of projects qualify as “green”;
iv)  enabling green finance markets to scale by reducing transaction costs.

Zero Emit Green Bond Markets Development Roadmap

The above illustration defines the Green Bond Markets Development Roadmap.  The idea is to assist in the growth of green development by introducing a transparent, trustworthy market for financing green development.

The above information was borrowed from this publication, Creating Green Bond Markets Report, to illustrate the drive to increase the green bond market in nascent economies.

Climate Bonds Initiative Adopted
Climate Bonds Initiative (CBI)
Climate Bonds Initiative is an international, investor-focused not-for-profit organization working solely on mobilizing the $100 trillion bond market for climate change solutions.

The CBI has also established guidelines to help investors achieve expectations about bond offerings and their green status.

In all cases the intention is to form a bridge to accomplish the UN’s Sustainable Development Goals.  When those goals have been met poverty will have been significantly reduces, the environment will be cleaner and social outcome of the people will be improved, and those directives lead to a more sustainable community, including the businesses that practice under the SDG umbrella.

Green Bonds provide the biggest boost for these six UN SDGs: 6, 7, 9, 11, 13, 15.

Sustainable Development Gold most benefited by Green Bond Finance
The below information was borrowed from the CBI Standard to assist readers see the 3 requirements to become a certified Climate Bond offering:
(1)  Fully aligned with the Green Bond Principles and/or the Green Loan Principles,
(2)  Using best practice for internal controls, tracking, reporting and verification,
(3)  Financing assets consistent with achieving the goals of the Paris Climate Agreement

Part A: Pre-Issuance Requirements

This section of the Climate Bonds Standard sets out the requirements that apply to all Certified Climate Bonds, Certified Climate Loans and Certified Climate Debt Instruments prior to the issuance or closing of the bond, loan or other debt instrument. These requirements are designed to ensure that:

  • the Issuer has established appropriate internal processes and controls prior to issuance or closing of the bond, loan or other debt instrument; and
  • these internal processes and controls are sufficient to enable conformance with the Climate Bonds Standard after the bond, loan or other debt instrument has been issued or has closed, and allocation of the proceeds is underway; and
  • the Issuer has provided a Green Bond Framework document which confirms its conformance with the Pre-Issuance Requirements of the Climate Bonds Standard.

For Issuers seeking Pre-Issuance Certification of their bond, loan or other debt instrument, all requirements set out in this section shall be met.

  1. Green Bond Development Funding Use of Proceeds
    1. The Issuer shall document the Nominated Projects & Assets which are proposed to be associated with the Bond and which have been assessed as likely to be Eligible Projects & Assets.  The Issuer shall establish a list of Nominated Projects & Assets which can be kept up-to-date during the term of the Bond.
    2. The expected Net Proceeds of the Bond shall be no greater than the Issuer’s total investment exposure to the proposed Nominated Projects & Assets, or the relevant proportion of the total Market Value of the proposed Nominated Projects & Assets which are owned or funded by the Issuer.
      Note: The Issuer may choose whether to use its investment exposure or debt obligation to the Nominated Projects & Assets or their Market Value when satisfying Clause 1.2.
    3. Nominated Projects & Assets shall not be nominated to other Certified Climate Bonds, Certified Climate Loans, Certified Climate Debt Instruments, green bonds, green loans or other labelled instruments (such as social bonds or SDG bonds) unless it is demonstrated by the Issuer that:
      1. distinct portions of the Nominated Projects & Assets are being funded by different Certified Climate Bonds, Certified Climate Loans, Certified Climate Debt Instruments, green bonds , green loans or other labelled instruments; or,
      2. the existing Certified Climate Bond, Certified Climate Loan or Certified Climate Debt Instrument is being refinanced via another Certified Climate Bond, Certified Climate Loan or Certified Climate Debt Instrument.
  2. Process for Evaluation and Selection of Projects & Assets
    1. The Issuer shall establish, document and maintain a decision-making process which it uses to determine the eligibility of the Nominated Projects & Assets. The decision-making process shall include, without limitation:
      1. A statement on the climate-related objectives of the Bond;
      2. How the climate-related objectives of the Bond are positioned within the context of the Issuer’s overarching objectives, strategy, policy and/or processes relating to environmental sustainability;
      3. The Issuer’s rationale for issuing the Bond;
      4. A process to determine whether the Nominated Projects & Assets meet the eligibility requirements specified in Part C of the Climate Bonds Standard.
         
        Note to 2.1: A wide variety of climate-related objectives are possible. These can vary from increasing the installed capacity of low carbon assets, such as solar power facilities, to having a specific objective focused on the operations or indirect effects of the projects & assets, such as emissions reductions.
        The climate-related objectives of the Bond, as stated by the Issuer, have implications for the reporting requirements under the Climate Bonds Standard. See Clauses 2.3, 5.2, 5.8, 6.1.1 and 8.4.

       
    2. The Issuer should include under Clause 2.1 further aspects of the decision-making process, including:
      1. related eligibility criteria, including, if applicable, exclusion criteria or any other process, applied to identify and manage potentially material environmental, social or governance risks associated with the Nominated Projects & Assets.
      2. any green standards or certifications referenced in the selection of Nominated Projects & Assets.
    3. The Issuer shall assess that all proposed Nominated Projects & Assets to be associated with the Bond meet the documented objectives as stated under Clause 2.1.1 and are likely to conform to the relevant eligibility requirements under Part C of the Climate Bonds Standard.
  • Green Bond Development Funding Management of Proceeds
    1. The systems, policies and processes to be used for management of the Net Proceeds shall be documented by the Issuer and disclosed to the Verifier, and shall include arrangements for the following activities:
      1. Tracking of proceeds: The Net Proceeds of the Bond can be credited to a sub-account, moved to a sub-portfolio, or otherwise tracked by the Issuer in an appropriate manner and documented.
      2. Managing unallocated proceeds: The balance of unallocated Net Proceeds can be managed as per the requirements in Clause 7.3.
      3. Earmarking funds to Nominated Projects & Assets: An earmarking process can be used to manage and account for funding to the Nominated Projects & Assets and enables estimation of the share of the Net Proceeds being used for financing and refinancing.

  • Reporting Prior to Issuance
    1. The Issuer shall prepare a Green Bond Framework and make it publicly available prior to Issuance or at the time of Issuance. The Green Bond Framework shall include, without limitation:
      1. Confirmation that the Bonds issued under the Green Bond Framework are aligned with the Climate Bonds Standard. This may include statements of alignment with other applicable standards, such as the EU Green Bond Standard, the ASEAN Green Bond Standard, Chinese domestic regulations, Japanese Green Bond Guidelines, etc.;
      2. A summary of the expected use of proceeds, as defined under Clause 1.1, and the expected contribution of the relevant sectors or sub-sectors to the rapid transition required to achieve the goals of the Paris Climate Agreement;
      3. A description of the decision-making process, as defined under Clause 2.1, with particular reference to the requirements in Clause 2.1.2;
      4. Information on the methodology and assumptions to be used for: confirming, where required by relevant Sector Eligibility Criteria, the characteristics or performance of Nominated Projects & Assets required to conform to the relevant eligibility requirements under Part C of the Climate Bonds Standard; and any other additional impact metrics that the issuer will define.
      5. A summary of the approach to the management of unallocated Net Proceeds in accordance with Clause 3.1;
      6. The intended approach to providing Update Reports to reaffirm conformance with the Climate Bonds Standard while the Bond remains outstanding;
      7. The list of proposed Nominated Projects & Assets associated with the Bond and the investment areas, as provided in Clause 9.1, into which the Nominated Projects & Assets fall. Where there are limits on the amount of detail that can be made available about specific Nominated Projects & Assets, information shall be presented on the investment areas which the Nominated Projects & Assets fall into, as provided in Clause 9.1, and the Issuer shall provide an explanation of why detail on Nominated Projects & Assets is limited;
      8. Where a proportion of the Net Proceeds are used for refinancing, an estimate of the share of the Net Proceeds used for financing and refinancing, and the relevant Nominated Projects & Assets or investment areas which may be refinanced. This may also include the expected look-back period for refinanced Nominated Projects & Assets.
         
        Note: Issuers are encouraged to disclose as much information as possible with respect to Nominated Projects & Assets. However, in many cases it is not possible for the Issuer to disclose detailed information about specific projects & assets prior to the issuance of the Bond. This limitation may be due to confidentiality arrangements with owners of projects & assets, the dynamic nature of the project portfolio, competitive considerations, or other legal provisions which limit the disclosure of detailed information.

        9.  
    2. The Issuer shall include in the Disclosure Documentation:
      1. The investment areas, as provided in Clause 9.1, into which the Nominated Projects & Assets fall;
      2. The intended types of temporary investment instruments for the management of unallocated Net Proceeds in accordance with Clause 7.3;
      3. The Verifier engaged by the Issuer for the mandatory verification engagements;
      4. The intended approach to providing Update Reports to reaffirm conformance with the Climate Bonds Standard while the Bond remains outstanding, including the location of the published documents;
      5. The Climate Bonds Initiative Disclaimer provided in the Certification Agreement.
         
        Note to 4.2.4: Issuers are encouraged to provide their Update Reports through existing reporting channels for the bond markets, such as the Electronic Municipal Market Access (EMMA) website for the US Municipality sector.

      Green Bond Certification

      A Certified Climate Bond or Certified Climate Loan or Certified Climate Debt Instrument: is a green bond, green loan or other green debt instrument that is Certified by the Climate Bonds Standard Board as meeting the requirements of this Climate Bonds Standard.  The certification permits the bearer to publish the adjacent seal on their bond documents.  This seal makes it easier to sell the bond because the USE of Funds has been independently certified to be “green”.  Zero Emit seeks Green Bond Development Funding Certification for its bond offerings.

      Green Bond Certification Process

      1

      Issuer begins by preparing the bond
      •  Identify assets that meet the relevant sector criteria and compile supporting information
      •  Create Green Bond Framework setting out how proceeds of the bond will be used by the Issuer’s internal controls

      2

      Engage a verifier
      •  Engage an Approved Verifier for Pre- and Post-Issuance Certification
      •  Provide them with relevant information
      •  Receive a Verifier’s Report giving assurance that Climate Bonds Standard requirements are met<

      3

      Get Certified & issue a Certified Climate Bond
      •  Submit the Verifier’s Report and Information Form to the Climate Bonds Initiative
      •  Receive a decision on Pre-Issuance Certification
      •  Issue the bond, using the Certified Climate Bond mark

      4

      Confirm the Certification Post-Issuance
      •  Within 24 months of issuance,submit the Verifier’s Post-Issuance report
      •  Receive notification of Post-Issuance Certification

      5

      Report Annually
      •  Prepare a simple report each year for term of the bond
      •  Provide it to bond holders and Climate Bonds Initiative
      •  Provide updates through public disclosure

       

      If you would like to view our process for getting this Green Bond Development Funding Project done please view our blog page for the articles. Zero Emit End Logo

       

       

       

      Leading our world with zero carbon emission Green Bond Development Funding.