The label of green bond
We will naturally associate a “green” label with environmental protection and expect a green bond to have something to do with the environment and climate change. With more and more green bonds in the market, what criteria must a bond meet to be called “green”? Does every green bond meet your expectations?
While bond issuers can label their bonds as green, they usually appoint independent third parties to perform external validation before and after the issuance to strengthen investors’ confidence in the bonds. These third parties will examine whether the bonds follow widely recognised criteria and standards or not, such as the “Green Bond Principles” (GBP) developed by the International Capital Market Association. The GBP state that the use of proceeds, process for project evaluation and selection, management of proceeds, and reporting are core principles for a green bond.
Investors like me usually evaluate a green bond based on its use of proceeds, expecting it to invest the money in green industries, projects, and economic activities. Similarly, when we subscribed to the government’s retail green bond, we also expected it to fund and promote green projects that would offer environmental benefits and drive the sustainable development of Hong Kong.
We may refer to the definition and categorisation of certain institutions and organisations to know what industries, projects, and economic activities a green bond should support. The "Climate Bonds Taxonomy" by the Climate Bonds Initiative, the "EU Taxonomy" by the European Commission, and the "Green Bond Endorsed Projects Catalogue" by the People's Bank of China are some examples. These resources allow issuers and investors to use a common language to identify widely recognised green industries, projects, and economic activities.
We should never make our investment decisions on the label only. Those investing in green bonds may hope to improve the environment and combat climate change. Therefore, they may be disappointed if a green default occurs, which means that the funds raised are not invested in any green projects, or that those projects fail to create the expected benefits to the environment and the climate, even though the investment returns are not affected.