Green bond

What it means

A green bond is a bond whose issuer commits to using the money raised solely for projects with environmental benefits. Typical examples are renewable energy, energy-efficient buildings, clean transport, water management or the circular economy. Legally it remains an ordinary debt security with a principal amount and interest.

The difference from a conventional bond lies not in repayment but in the promise about how the proceeds will be used, and in transparency. The issuer usually publishes a framework describing eligible projects, how they are selected, how proceeds are managed, and regular reporting on the use of funds and the impact achieved.

The market relies on voluntary principles, such as the standards of international capital market associations, and the European Union has also introduced its own European green bond standard linked to the EU taxonomy. Compliance with the framework is often confirmed by an independent reviewer.

How it works in practice

Green bonds are issued mainly by governments, banks, energy and property companies, but also by mid-sized firms financing a specific investment such as a solar plant or building renovation. Investors find them attractive because they combine a return with an environmental goal and fit their ESG strategies.

The issuer must track exactly where the money went. In the accounts, the bond is shown as an ordinary liability and the interest, the coupon, as a finance cost, but alongside that the allocation of proceeds to individual projects has to be recorded. That record underpins the annual impact reports and any review by the external assessor.

A company considering an issue should compare the costs. Preparing the framework, the external review and ongoing reporting take money and time, so a green bond makes sense for a larger issue or where a wider investor base is expected. For smaller investments, a sustainability-linked loan or ordinary green financing may be simpler.

What to watch out for

If the proceeds of a green bond are used differently from what the issuer promised, it risks accusations of greenwashing, reputational damage and, in some cases, legal claims from investors. The framework should therefore not promise more than the company can realistically deliver and document.

Investors should not rely on the green label alone. A green bond carries the same credit risk as any other bond from the same issuer, so its financial condition, the terms of the issue and liquidity need assessing, not just the environmental story.