In a recent post, we’ve pointed out the potential advantages of issuing Green Bonds, including potentially lower interest rates. In this post, we’re going to tell you how to issue bonds that carry the Green Bonds designation. This process calls for you to take steps both before and after you borrow the money.
There are no laws or regulations that govern the process of labeling something as a Green Bond. For now, there are just a variety of suggested standards and emerging practices. And in fact, there are companies out there that will give you a certification for compliance with their particular standards, but at this point we don’t recommend seeking (or paying for) those certifications. As standards and practices evolve that may become a worthwhile undertaking, but based on our research, investors who are interested in Green Bonds currently are not requiring third-party stamps of approval.
In describing this process, we will generally follow the suggestions of the International Capital Market Association, which is an influential industry trade group and one of the many organizations offering Green Bond standards. ICMA evaluates four factors in determining whether something counts as a Green Bond, as follows:
(1) the use of the proceeds;
(2) the issuer’s process for project evaluation and selection of the label;
(3) management of proceeds; and
(4) an issuer’s reporting its use of proceeds.
If you can meet these criteria, then you can label your bonds as Green Bonds. This label should appear in both what you call the bonds – such as “General Obligation Water Bonds (Green Bonds), Series 2022” and in any official statement or other disclosure document you use for the bonds. You should also have your Green Bond process approved by the governing body at some point in the process.
(1) Use of Proceeds
A bond issue satisfies the first factor if the issuer uses the proceeds for environmental objectives. ICMA lists ten broad categories a project can fall under to become eligible for the Green label: (1) Renewable Energy; (2) Energy Efficiency; (3) Pollution Prevention and Control; (4) Environmentally Sustainable Management of Living Natural Resources and Land Use; (5) Terrestrial and Aquatic Biodiversity; (6) Clean Transportation; (7) Sustainable Water and Wastewater Management (which includes stormwater projects); (8) Climate Change Adaptation; (9) Circular Economy Adapted Products, Production Technologies and Processes; and (10) Green Buildings.
(2) Process for Project Evaluation and Selection
Once you have a qualifying project, the next step is to show investors the method you used to make that determination So, an issuer of a Green Bond should clearly communicate the following information: (1) the environmental sustainability objectives of the project; (2) the process the issuer uses to determine whether the project qualifies for the Green label; and (3) the manner the issuer identifies and manages perceived social and environmental risks associated with the project. For most projects, the environmental benefits will be readily identifiable, and it won’t take much explanation. A brief description of the above factors in the official statement for your bonds can be sufficient to cover these three topics.
(3) Managing Proceeds
An issuer should track the Green Bond proceeds separately from other bond proceeds so that the issuer can demonstrate over time that the Green Bond money was in fact used for the stated projects. This doesn’t require any separate bank account – just whatever it takes to show the application of the designated proceeds for the identified projects. If someone showed up at the office asking, how would you demonstrate the application of funds to them?
Demonstrating to investors that you used the proceeds for the identified projects is a key to the Green Bonds process. Investors will want to know up front how you intend to keep them informed of the progress of the project. We recommend the following steps –
- Commit to report annually on the status of the project and the use of the proceeds, at least until the project is placed in service. The more complicated the project, the more detail you may need in this disclosure.
- Commit to report promptly if the project suffers some major delays or cost overruns, or is taken out of service before the bonds are paid off.
- Commit to provide these reports either through the EMMA continuing disclosure system, or in an easy-to-find spot on your website. The EMMA system is probably the easiest way to communicate the information, but we do not recommend that you make this Green Bond disclosure part of your legally binding continuing disclosure obligation. Instead, make this a separate undertaking related only to the Green Bonds process.
- Put your commitment in the official statement for your bond issue
ICMA has published templates available for reporting, which can be found here and here. In reporting, the idea is to make sure investors are “kept in the loop” and reasonably updated on all pertinent information. In other words, unlike the Steve Miller Band’s late ‘70’s song – don’t take their money and run!
Before issuing a Green Bond ask yourself: (1) is the project we seek to fund environmentally beneficial; (2) can we explain to others why we are labeling our bond as Green; (3) can we manage the proceeds for this project consistently and with transparency; and (4) can we consistently report to investors on our use of the funds and the progress of the project? If the answer to each of these questions is yes, feel free to add the Green label to your bond issue.
This is a relatively new field where the standards and processes are still developing. Feel free to contact us whenever you want to talk about the possibility of Green Bonds for your community.
Please click here to learn more about our public finance practice, and click here for our disclaimer. Will Swain has been the principal author of this post.