Author: Ozgur Kocabasoglu
“Green Bonds” are, in brief, fixed income securities issued for borrowing from the markets in accordance with the conditions in the prospectuses accepted by the issuers, designed specifically for use in preventing climate change or for other environmental projects. In addition to promoting sustainability, these bonds provide certain tax advantages.
The global Green Bond market (including all green, social and sustainability bonds) is expected to reach a size of over 650 billion USD in 2021.[1] Considering that the first such bond was the “climate awareness” bond issued by the European Investment Bank in 2007, and that the first bond actually labeled as a Green Bond worth 300 million USD was issued by World Bank in 2008, the growth reached in this short time may be seen more clearly.[2] In fact, as of May 2021, the World Bank has issued more than 185 Green Bonds worth $16 billion in 23 different currencies.
The Green Bond market is gaining in value day by day and attracting many investors. In 2020, the issuance of bonds in the green, social, sustainable and sustainability-related bond market (“GSSS”) doubled compared to 2019 and reached 600 billion dollars. The issuance of Green Bonds in the GSSS market reached a size of 300 billion dollars.[3]
As the Green Bond market continues to grow, it has become necessary to set certain standards for the appropriate use of Green Bonds issued in the market. The first advisory guidelines in this area were published in 2014 by a consortium consisting of Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Bank, JPMorgan Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho Securities, Morgan Stanley, Rabobank, and SEB. On the other hand, there are currently guidelines and draft regulations that have been prepared by the International Capital Markets Association (ICMA), the World Bank, and the European Securities and Markets Authority (ESMA) of the European Union.
With the Law on the Approval of the Paris Agreement, published in the Official Gazette dated 7 October 2021 and numbered 31621, the transformation process of Turkey's climate policy has begun. Capital markets will play an important role in this transformation process in terms of financing bond issuers who want to address the negative effects of climate change. In this context, it is expected that projects related to sustainability goals will continue to be developed in Turkey and that these investments will be financed through Green Bonds.
In this context, it would be useful to take a look at the most commonly used guidelines.
The Practice of The World Bank (World Bank Green Bonds)
Projects eligible for the World Bank Green Bond[4] Program are selected by the bank's environmental experts. “Eligible projects” refers to projects that are partially or wholly financed by the World Bank and which support the transition to low-carbon and climate-resilient growth in the recipient country. Eligible projects may be projects that aim to mitigate climate change and carbon emissions, such as investments in renewable energy, or improvement or adaptation projects of industries that aim to have less impact on climate change and to emit less carbon. In order to become eligible, candidate projects first undergo a preliminary examination in order to monitor their potential environmental and social impacts. It is then approved, like all other World Bank projects, by the Board of Directors, which consists of 25 members representing member states.
The proceeds of the issued bonds are transferred to a special account and used within the framework of the World Bank's liquidity policies until they are used for the relevant green project.
Monitoring and reporting activities are ensured by the reports to be received from the government institutions proficient in the relevant sector. The development and impacts of the project are supervised by the relevant government institution and the World Bank.
Green Bond Principles (GBP)
The GBP[5], which were most recently renewed in June 2021, aim to ensure the transparency and accuracy of the information conveyed to the investors by the bond issuers. Four fundamental components are listed in the GBP:
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Use of Proceeds: According to the GBP, the projects in which the proceeds of the bond will be used shall be stated clearly and in detail. “Green projects” that will benefit the environment shall be preferred. The green project shall support one of the following issues:
- Climate change mitigation
- Climate change adaptation
- Natural resource conservation
- Biodiversity conservation
- Pollutions prevention and control
Although some green project categories are mentioned in the guidelines, these categories are not exhaustive. These categories are renewable energy, energy efficiency, pollution prevention and control, environmentally sustainable management of living natural resources and land use, terrestrial and aquatic biodiversity, clean (public) transportation, sustainable water and wastewater management, climate change adaptation, circular economy adapted products, and green buildings.
The GBP does not set clear boundaries as to which projects are green projects, but rating agencies which provide independent analysis, advice, and guidance, may determine which projects are included within the scope of green projects.
- Process for project evaluation and selection: According to the GBP, the bond issuer shall inform the investors about the purpose and objectives of the green project, and the category of the green project, which can be environmental, social, or climate change projects.
- Management of proceeds: The proceeds of the Green Bond to be issued shall be credited to a special sub-account or sub-portfolio in a transparent manner that can be disclosed to independent advisors, or shall be properly monitored and reported by the issuer. The guide recommends appointing an external reviewer to ensure transparency.
- Reporting: The GBP requires that the information flow shall be ensured through annual reports. The annual report should explain how much of the proceeds is allocated to which projects and its impact. Reference is made to the ICMA templates (“Impact Reporting Metrics and Databases”), which are also used in other guidelines on GBP reporting.
Although external review is not obligatory in the guide, it is among the recommended elements. The guidelines recommend carrying out an external review before and after the issuance and publishing these reviews on the relevant web pages...
[2] https://www.oecd.org/environment/cc/Green%20bonds%20PP%20%5Bf3%5D%20%5Blr%5D.pdf
[3] https://www.environmental-finance.com/assets/files/research/sustainable-bonds-insight-2021.pdf
[4] https://treasury.worldbank.org/en/about/unit/treasury/ibrd/ibrd-green-bonds#2
