Green Bonds: where do we stand?

Bonds in general are debt instruments used by public entities or private companies to raise funds. When you buy a bond, you lend money to the issuing entity in exchange for the promise of a return, usually in the form of periodic interest and repayment of the principal when the bond matures. Green bonds or Green bonds are a specific category of bonds. Their distinguishing feature is that the funds raised through the sale of these bonds are used to finance sustainable environmental projects, such as energy efficiency, sustainable water and waste management, regeneration of biodiversity and climate change mitigation. In summary, the main difference between traditional and green bonds lies in the specific use of the funds raised.

Green Bonds represented an excellent tool in the green transition that our society is facing in this historical period, allowing investors to allocate funds for this purpose. Since 2007, they have undergone exponential growth, surpassing the US$500 billion mark globally in 2021, an increase of 75% over the previous year. Currently, green bonds account for 3.5% of total bonds. Europe dominates this sector and covered 51% of all green bonds globally in 2020. These figures over time have heightened the attention of the European community, along with some risks related to lack of transparency.

These debt instruments can be purchased by governmental entities, international organisations and private companies. Until now, there was no regulation to check that green bonds were actually intended for sustainable projects, increasing the risk of private entities exploiting them for greenwashing. As is often the case in such cases, the European Union intervened to eliminate this risk by submitting a proposal for a regulation. On 30/11/2023, the act was published in the Official Journal for the new EU Standard establishing uniform rules for bond issuers who wish to use the name "European Green Bond" (in English: European Green Bond) or "EuGB" for the marketing of their bonds. The work will be checked by external auditors, for whom the lack of conflict of interest towards the companies involved will first be verified.

This instrument ties in closely with the issue of the European Taxonomy, although until this becomes fully operational, only 85% of the funds raised for Green Bonds must be allocated to activities in line with the Taxonomy itself. This will provide initial flexibility that will be removed later. In any case, the new Standard makes investors' choices more transparent and secure, and favours those companies that are able to show the effectiveness of ongoing projects with the support of methodologies and data. Tools such as these allow us to set ambitious goals and achieve more concrete results regarding the great challenge we face today.