Green Bonds

Author: Lina Helen Kleine Klausing, August 23. 2024

1        Relevance

The issue of combating climate change is currently a highly salient topic in the academic and public discourse. Global warming confronts us with a series of challenges that require the development of solution strategies to overcome. As reported by the EU climate change service Copernicus (2024)¹, June 2024 was the hottest June since global temperature records began. In June 2024, a temperature increase of 1.5°C was recorded in comparison to the average temperatures recorded in pre-industrial times from 1850 to 1900.¹ In 2015, 196 countries adopted on a global climate protection agreement at the UN Climate Change Conference in Paris with the aim of limiting global warming to below 2°C compared to the pre-industrial levels and to finance the reduction of greenhouse gas emissions and the development of climate resilience.^2,3 In particular, the objective of the Paris Agreement is to avoid exceeding a global average temperature rise of 1.5°C, as exceeding this value would pose a global risk with far-reaching consequences.³ As indicated by data from Copernicus (2024)¹, the 1.5°C threshold was exceeded for the twelfth time in succession in June 2024. This underlines the requirement for additional measures to be implemented in order to achieve the temperature objective of 2°C set out in the Paris Agreement. A reduction in greenhouse gases and the achievement of climate neutrality are required for this. The implementation of the measures also requires that companies rethink and adapt their business practices in order to achieve a more climate-friendly approach.⁴  As part of the Paris Agreement, companies are advised to integrate environmental, social and governance (ESG) strategies into their business plans.⁴ However, the realisation of the measures and projects is associated with considerable capital requirements, which must be covered by both public and private investment.⁵ In this context, it is necessary to determine which financial instruments are best suited to climate financing. In recent years, green bonds have emerged as one of the most prominent instruments for climate financing.

The objective of this bachelor’s thesis is to provide an explanation of the nature and functions of green bonds as a climate-friendly financial instrument, as well as to present a set of practical applications pertinent to the context of green bond issuance. The bachelor thesis is structured as follows. Firstly, the methodology section outlines the procedure for the selection and analysis of the scientific literature. The thesis is then subdivided into two main sections: the literature review and the practical implementation. The literature section begins with the fundamentals and background of green bonds, including a definition of green bonds and an overview of the development of the global market for green bonds. Subsequently, the two most important actors in the green bond market, namely issuers and investors, and the rationale behind their issuance of green bonds are presented. The final part of the literature review considers the impact of green bonds, examining both the financial and ecological dimensions. As part of the practical implementation, globally recognised standards are initially presented, which serve as a voluntary framework for the issuance of green bonds. A particular focus is placed on the Green Bond Principles, which form the basis for a large numbers of green bond issues and further on for other standards. Building on this, two company examples are presented that have created a green bond framework and had it verified by an external review. Three guidelines are then presented and compared, which were made available to issuers to support the issuance of green bonds and provide best practices based on international experience. Finally, the drivers and barriers for implementing green bonds in companies and organisations are presented.

2        Literature Review

2.1       Fundamentals and Background

This section offers an initial overview of the fundamental characteristics of green bonds and the development and actors in the green bond market.

2.1.1      Definition of Green Bonds

Green bonds are fixed-income securities that allow both issuers and investors to support projects that promote environmental sustainability and counteract climate change.^4,5 Green bonds are generally structured like conventional bonds.^10,11 Schuster & Uskova (2015)¹² describe a bond in the following way. The issuer of a bond borrows from many different investors. The issue volume is divided into many shares. At the end of the term, called the maturity of the bond, the issuer is obliged to repay these shares. In return for providing the money, the investor receives a fee in the form of interest. The interest rate is called the coupon and is paid periodically, usually annually, over the life of the bond.¹² The main difference is that a use of proceeds for green bonds is specified, indicating that the proceeds will be used for financing or refinancing green projects.^9,11 These green projects are characterised by the fact that they make an environmental contribution to mitigating or preventing climate change.¹³

The problem is that people struggle with the definition of green bonds.⁴ There is no single, universally recognised definition of green bonds.^5,14 A commonly used definition is that of the International Capital Market Association (ICMA), which defines green bonds as “any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects” (ICMA , 2022a, p. 3)¹⁵. 

Other disagreements relate to the definition of green projects. There are different views on which projects qualify as green and which do not.⁶ There are already voluntary standards trying to define green and sustainable projects. Among the most prominent are the ICMA’s Green Bond Principles (GBP) and the Climate Bond Standard (CBS) developed by the Climate Bond Initiative (CBI).¹⁴ Chapter 4.1. describes these two standards and the recently published EU Green Bond Standard. Eligible projects according to the GBP are for example renewable energy, energy efficiency, pollution prevention and control, clean transportation, sustainable water and wastewater management and green buildings.¹⁵ In 2023, the proceeds of green bonds were used as shown in Figure 1. Energy (35%), buildings (18%) and transport (22%) are the three largest Use of Proceeds sectors in 2023. These are followed by water (6%), waste (5%) and land use (6%). Smaller categories are industry with 2%, information and communication technologies (ICT) with 2% and unspecified A&R with 4%. 

Green Bonds are a type of labelled bonds, as the name already implies what they aim to finance.^5,11 Other examples of labelled bonds are war bonds, which were used to finance military expenditure in times of war, or railroad bonds, which were used to finance transport projects.⁵ Moreover, green bonds may be regarded as a form of impact investing.¹⁷ Impact investing is the practice of investing in companies, projects and funds with the specific intention of achieving a measurable positive impact on the environment or society, in addition to a positive financial return.¹⁸

As outlined by ICMA (2022a)¹⁵, the current classification of green bonds encompasses four distinct types: Standard Green Use of Proceeds Bond, Green Revenue Bond, Green Project Bond, and Secured Green Bond. These four types and their characteristics are listed in Table 2.

Table 1: Types of Green Bonds, ICMA (2022a, p.8)¹⁵

2.1.2      Development of the Green Bond Market

The green bond market is a relatively young market and has grown rapidly in the recent years.¹⁹ The first green bond was issued by European Investment Bank (EIB) in 2007, called climate awareness bond.^5,20 The World Bank issued its first green bond just one year later in 2008, which was marketed to a wider range of investors.^5,20 In the years that followed, green bonds were issued mainly by supranational agencies and sovereigns, and private participation remained low due to information asymmetries and a lack of green definitions and standards.⁹

According to the CBI (n.d.)²¹, the issuance of the first green corporate bond by Swedish property company Vasokronan in November 2013 marked a turning point in the green bond market. The market started to boom in 2014. Since then, a new record has been set every year. Milestones are 2015, when cumulative green bond issuance reaches USD 100 billion; 2017, when cumulative issuance reaches USD 250 billion; and 2020, when cumulative issuance reaches USD 1 trillion.²¹Ehlers & Packer (2017)¹⁹ describe the introduction of the GBPs in January 2014, the foundation of many existing green labels, as the driver for the growth of the green bond market.

Figure 2 shows the amount of green bonds issued between 2014 and 2023, classified by regions. There is a steady increase in the total volume of green bonds issued until 2021. In 2022, the growth rate decreases slightly compared to 2021. USD 593.9 billion is issued in 2021 and USD 509.6 billion in 2022. This drop in volume is mainly due to “post-COVID-19 inflation concerns and broader market volatility following the Russian invasion of Ukraine” (CBI, 2022, p. 3)²². In 2023, the total volume increases again to USD 587.7 billion. In 2023, over half of the total volume of green bonds (close to 53%) originated from Europe.²³ Asia-Pacific was the second most important region for green bond issuance, representing approximately one-third of the global total issuance (USD 190.2 billion)¹⁶.²³

Africa is a region particularly vulnerable to the risks of climate change.²³ The CBI (2024b)²³ documents that the green issuance from Africa has increased significantly, with a 326% year-on-year increase compared to 2022. In the year 2023, an aligned volume of USD 2 billion was documented. In comparison to the previous year, the number of issuers increased from four to eleven in 2023.²³

In 2023, the total cumulative size of the green bond market was USD 2.8 trillion across 96 countries and 53 currencies.²³China is the leading country source in the green bond market in 2023 with USD 83.5 billion, followed by Germany (USD 67.5 billion) and the USA (USD 59.9 billion).²³ The top 3 currencies in the market in 2023 were led by EUR with USD 260 billion, followed by USD (USD 126.7 billion) and CNY (USD 79.2 billion).²³ A total of 2,746 green bonds were issued in 2023, which represents a decrease of around 29% compared to the 3,848 green bonds issued in 2022.¹⁶

However, the share of green bonds is still a very small part of total global bond issuance. Table 3 shows the share of green bond issuance in global long-term fixed income issuance. The percentage share has increased more than elevenfold from 0.204% in 2014 to 2.262% in 2022.

Table 2: Share of Green Bond Issuance (%), own illustration using data from SIFMA Research (2023)²⁴ and CBI (2024a)¹⁶

2.1.3      Actors in the Green Bond Market

The green bond market has the same players as the general bond market. Park (2018)²⁵ lists a number of actors and stakeholders that regulate the green bond market. These include “issuers, underwriters, investors, credit rating agencies and research organizations, advocacy groups, multilateral institutions, stock exchanges, and government agencies” (Park, 2018, p. 6)²⁵. The two most important stakeholders are issuers and investors, which are explained in more detail below. 

In their study, Maltais & Nykvist (2020)¹¹ discern three categories of motivations and drivers for investment in the green bond market. These are the financial case, the business case and the legitimacy and institutionally oriented drivers. The financial case is driven by motivations, including enhanced financial returns, lower financial risk and cost of capital, as well as universal investor incentives. The business case also encompasses aspects such as brand development, market expansion and risk reduction. Legitimacy and institutionally oriented drivers can include the pursuit of legitimacy and the attainment of institutional recognition, as well as the influence of institutional pressures.¹¹

2.1.3.1     Issuers

With the steady growth of the green bond market, there has also been an increase in the number of issuers. To provide an overview of the different types of issuers, they have been divided into sub-groups. According to Jäger et. al (2021)⁵, on the one hand there are the governmental players, which are further subdivided into regional, national, international, sub-sovereign, sovereign and supranational issuers. On the other hand, there are private sector companies that issue corporate green bonds. In the early years, green bonds were almost exclusively issued by supranational institutions and organisations.⁵ In particular, multilateral development banks, such as the EIB, were responsible for green bond issuance from 2007 to 2012.⁵ Until 2013, there were practically no corporate green bonds on the market.²⁶ In 2023, around USD 335 billion of corporate green bonds were issued.¹⁶ This represents around 57 % of the total green bond market. As a result, corporate green bonds have seen strong growth and are playing an increasingly important role in practice.²⁶

Figure 3 shows the percentage development of each type of issuer from 2014 to 2023. The CBI distinguishes between sovereigns, development banks, local governments, government-backed entities, financial corporates and non-financial corporates.¹⁶ As described above, a large share of green bond issuance (57% in 2023) is accounted for corporate entities, including financial and non-financial corporations. The development of financial corporations has risen from 14% in 2014 to almost the double a year later (27% in 2015). Since 2015, the share has remained relatively constant at a level between 23% and 29%. Only in 2018 did the share increase to 34%. In 2023, the share of financial corporates was 28%. Since 2019, the share of non-financial corporates has remained at a level between 25% and 29%. Since 2016, the share of the amount of green bonds issued by sovereigns has steadily increased from 1% (2016) to 20% (2023). The share of local government green bond issuance is rather low and was around 2% in 2023. The share of green bonds issued by government-backed entities rose significantly between 2014 and 2017, from 4% to 30%. However, the share has been decreasing since 2017 and was only 12% in 2023. In 2014, the share of green bonds issued by development banks was 42%, which decreased four years later to 9% in 2018. Since then, the share has remained constant between 8% and 10%.

An important question is why do issuers choose to issue green bonds rather than conventional bonds? 

In their survey, Maltais & Nykvist (2020)¹¹ identify “broadening the investor base, lower capital costs, and meeting investor demand for sustainable investment products” (p.10) as the three key incentives for issuing green bonds. The incentives most frequently referenced are primarily financial in nature, such as the provision of a discount for issuers of green bonds relative to conventional bonds or enhanced access to capital through the issuance of green bonds. However, Maltais & Nykvist (2020)¹¹ posit that these incentives are not the primary drivers for issuers’ decisions to issue green bonds. Instead, non-financial incentives are of greater significance for the surveyed issuers. For instance, issuing a green bond enables issuers to communicate externally that they have already made strides in sustainability and that the green bond issuance builds upon this foundation. In addition, the authors identify a further motivation for issuing green bonds, namely a branding incentive.¹¹

According to Flammer (2021)²⁶, there are three potential reasons why companies choose to issue green bonds, namely (1) signalling, (2) greenwashing and (3) the cost of capital. According to (1) the signalling argument, a key objective is to reduce information asymmetry between issuers and investors in order to reduce transaction costs. Flammer (2021)²⁶writes, that investors often do not have enough information to assess a company’s level of commitment to the environment and climate protection. The issuance of green bonds, therefore, serves to signal such a commitment to prospective investors. The company invests money directly in green projects that are effective for the environment and are transparent to investors through the company’s reporting and additional external and independent certification.²⁶ This certification is initially cost-intensive for the companies, but it can bring some advantages in the long term.⁵ It enhances the issuer’s reputation on the market, information asymmetries can be reduced²⁷ and the investor base can be broadened²⁸. Another potential rationale for issuing green bonds is (2) the greenwashing argument. Greenwashing is defined as “[…] a strategy or a practice – through marketing actions and communication – used by a company to position itself in the public eye as environmentally friendly, while its activities are harmful to the environment.” (Bernard-Rau & Schnerring, 2022, p. 46)¹⁸. In the context of issuing green bonds, greenwashing refers to the risk that the proceeds generated by the bonds are not actually result into green, eligible projects.²⁹  According to Flammer (2021)²⁶, some practitioners have concerns about whether green bonds really make a difference, or whether companies are issuing green bonds for greenwashing motivations to improve their image. She posits that these reservations are founded upon the absence of public governance in relation to green bonds.²⁶ Another reason, according to Jäger et. al (2021)⁵, is the non-binding rules for green bond standardisation. The existing standards, such as the ICMA’s GBP, are only voluntary guidelines with some room for manoeuvre.⁵ However, Flammer (2021)²⁶ argues that there are alternative, less costly techniques for greenwashing. These include, for example, the use of questionable eco-labels and misleading visual representations.²⁶ Jäger et. al (2021)⁵thinks that there are clear obstacles for issuers that make abuse more difficult. If a bond goes through the entire process of a green bond framework, including full certification by a second party, greenwashing appears to be largely ruled out.⁵ The third reason for issuing a green bond could be the cost of capital argument. According to Flammer (2021)²⁶, green bonds could be a more favourable source of financing compared to conventional bonds. The reason for this could be that investors in green bonds accept lower yields in return to making a contribution to mitigate the effects of climate change.²⁶Whether the issuance of green bonds offers their issuers advantages in terms of financing costs is a question that is the subject of debate in the literature. In section 3.2.1, the debate will be examined in more detail and the results of previous research will be presented.

2.1.3.2     Investors

Investors are another key stakeholder group in the market. In order to make an investment decision regarding green bonds, investors need information that allows them to assess whether the bond actually fulfils environmental and green criteria and to what extent the proceeds contribute to a positive environmental impact.³⁰

In the study conducted by Maltais & Nykvist (2020)¹¹, the investors surveyed indicate that the majority of the incentives are non-financial in nature, as opposed to financial. The respondents indicate that their investment in green bonds is driven by a desire to enhance their appeal to customers. This is due to the fact that a considerable number of clients require companies to provide evidence of their contribution to sustainability. Financial incentives do not play a significant role in the majority of respondents’ investment decisions. However, green bonds are perceived as a potential means of mitigating risk in comparison to investing in conventional bonds. Furthermore, the responses indicate that the motivation for investing in green bonds was not driven by a desire for legitimacy or the influence of institutional pressure.¹¹

In the study conducted by Sangiorgi & Schopohl (2021)³¹, three key decision criteria for investing in green bonds are identified. For investors, (1) the green credentials of the bond at the time of issuance, (2) the pricing of the bond and (3) the green credentials of the bond after issuance are of significant relevance.³¹ References that take into account the aspect of sustainability are of great importance for investors. The lack of such consideration means that investors are not interested in investing in corresponding bonds.³¹ These findings corroborate the signalling argument put forth by Flammer (2021)²⁶, which posit that green bond issuances serve as a signal for issuers’ green credentials and commitment in regard to environmental issues. Furthermore, adequate pricing of the green bond compared to a conventional bond is a key factor in investors’ decision-making.³¹ The green bond must therefore be competitive.³¹ However, this is in contrast to Flammer’s (2021)²⁶ cost of capital argument, as investors are unlikely to accept significantly higher prices for green bonds.

In 2019, the CBI (2019)³² conducted a survey of European green bond investors to ascertain their perceptions of the green bond market. This entails an analysis of the factors that could motivate investors to make green bond investments and thus promoting market growth. Investments are primarily aimed at making a high contribution to climate protection, with capital being channelled into those sectors where the greatest reductions in greenhouse gas emissions are required. The respondents indicate that there is a greater demand for issuance in the following sectors: industrials, energy and utilities, consumer cyclicals, and materials. Among the types of investment, investors prefer green bonds issued by non-financial corporates, followed financial corporate and sovereign issuers. In this survey, 93% of respondents state that they favour corporate issuance as an investment channel. The decision to invest in a green bond is significantly influenced by three criteria: green credentials at issuance, pricing and green credentials post-issuance.³² These criteria correspond to the previously presented results by Sangiorgi & Schopohl (2021)³¹. Moreover, respondents indicate that positive fundamentals of the issuer and transparency of the issuer, followed by transparency of the use of proceeds, are factors that make an investment in green bonds more interesting.³²

2.2       Impacts of Green Bonds

This section presents an overview of the financial and environmental impacts of green bonds, as documented in the academic literature.

2.2.1      Financial Impacts

The financial impact studies can be divided into three categories: Firstly, the impact on risk; secondly, the existence of a green bond premium, in particular whether green bonds have lower yields than conventional bonds; and thirdly, the reaction of the stock market to the announcement of a green bond. Furthermore, the impact of issuing a green bond on the issuer’s ownership structure has been analysed.

The question of whether green bonds are less risky than conventional bonds is one topic of interest. There are only a small number of studies in the academic literature that deal with the risk of the green bonds compared to conventional bonds.³³Most of the studies deal with the connectedness of the green bond market with other markets.  Dong et al. (2023)³⁴analyse the effects of geopolitical, economic and climate policy risks on green bonds. Their findings indicate that green bonds, like conventional bonds, offer “a safe-haven function” (Dong et al., 2023, p.1)³⁴ against high geopolitical risks. However, in the case of high economic and climate policy risks, green bonds perform better as a safe haven than conventional bonds. The authors also point out that integrating green bonds into an investment portfolio enables better hedging of risks as it leads to portfolio diversification.³⁴ Reboredo (2018)³⁵ analyse the correlation between the green bond market and other financial markets. For investors, the diversification of their investment portfolio is of significant importance in order to minimise risk. As part of the analysis, the co-movements of the green bond market with the corporate and treasury bond markets, the equity markets and the energy markets were examined. The analysis demonstrates that the green bond market is symmetrically dependent on the corporate and treasury bond markets. He states that an investment in the green bond market does not provide any significant diversification advantages for investors who already invest in the corporate and treasury bond markets. However, there is a relatively weak symmetrical dependence of the green bond market on the equity markets and independence from the energy markets. Reboredo (2018)³⁵ concludes that there are diversification advantages for investors who already invest in stocks and energy markets. Liu (2022)³³ demonstrate that the market for green bonds responded to the COVID-19 pandemic in a manner analogous to that observed in the conventional bond market. In extreme conditions, such as those caused by the pandemic, the green bond market exhibits high negative yields, as does the conventional bond market. Liu (2022)³³ observed that there is a co-movement between the green bond market and the corporate and treasury bond market with regard to volatility, which is consistent with the findings of Reboredo (2018)³⁵. Furthermore, Liu (2022)³³ document that fluctuations in the energy market have no discernible effect on the green bond market. 

A key topic of the academic debate is the existence of a green bond premium. The term ‘green bond premium’ is used to describe the difference in yield between a green bond and a conventional bond with comparable characteristics.⁸ A negative premium describes that green bonds are issued or traded at lower yields than comparable conventional bonds, also known as a greenium. “A ‘greenium’ implies that the yield an investor is willing to accept for a ‘green’ asset is lower than that of conventional counterparts.” (MacAskill et al., 2021, p.1)⁸. A negative premium can offset the additional costs for the process of issuing a green bond, such as the monitoring and reporting of the use of proceeds or the certification process.³⁶ In terms of additional costs, the CBI’s certification process is estimated to cost around 0.1 basis points (bps) and reporting costs are estimated to be between 0.5 and 3 bps.⁸ A positive green bond premium describes that green bonds are issued or traded at higher yields in comparison to comparable conventional bonds. The field of green bond premium research has grown considerably in recent years.⁷ The results of the studies on the existence of a green bond premium vary widely. Some studies document the existence of a negative premium. These include, for example, the studies by Karpf & Mandel (2018)³⁷, Zerbib (2019)³⁸, Gianfrate & Peri (2019)³⁹ and Fatica et al. (2021)³⁶. Other studies find controversial evidence of the existence of a green bond premium, like Hachenberg & Schiereck (2018)²⁰, Tang & Zhang (2020)¹⁴ and Hyun et al. (2020)²⁸. However, other studies show that there are no statistically significant differences between green bonds and comparable conventional bonds. These include, for example, the studies by Larcker & Watts (2020)⁴⁰and Flammer (2021)²⁶. Table 4 below presents the results of eight studies investigating the existence of a green bond premium.

The study by Hachenberg & Schiereck (2018)²⁰ is centred on green bonds, with a particular focus on the ratings assigned to them. The results demonstrate that AA-, A- and BBB-rated green bonds traded tighter than their comparable conventional green bonds. Conversely, only AAA-rated green bonds traded 0.45 bps wider. Overall, they find a small negative green bond premium of -1,18 bps on average.²⁰ In contrast, Zerbib (2019)³⁸ observes that green bonds with lower ratings have a more negative premium. Karpf & Mandel (2018)³⁷ identify a negative premium of -7.8 bps on the secondary market of the US municipal bond market. Similarly to Karpf & Mandel (2018)³⁷, Larcker & Watts (2020)⁴⁰conduct an analysis of green bonds from US municipal issuers, but in this case, they focus on the primary market. In order to identify comparable bonds, precise specifications were defined for the matching method. They specify that a pair of green and non-green bonds must be issued by the same municipality on the same day, have the same maturity and rating.A positive difference of 0.45 bps was observed between the yields of green and comparable non-green bonds. However, in 85% of the matched cases, the difference in yield is exactly zero. As a result, they conclude that the premium is exactly zero.⁴⁰ These findings differ from those previously reported by Karpf & Mandel (2018)³⁷. Zerbib (2019)³⁸ investigates the potential influence of environmental preferences on the pricing of green bonds. His findings indicate a negative green bond premium of -2 bps, thereby demonstrating that the influence of investors’ pro-environmental preferences is relatively limited with respect to bond prices. He posits that the lower cost of debt for companies with good environmental performance is primarily a result of lower financial risk rather than investors’ non-financial preferences.³⁸ Gianfrate & Peri (2019)³⁹ distinguish between corporate and non-corporate green bonds in their study. They find a negative green bond premium in the primary market of -21 bps on average for corporate green bonds and -15 bps on average for non-corporate green bonds. On the secondary market they also find a negative, but the evidence is stronger in the primary market.³⁹ Tang & Zhang (2020)¹⁴ find on average a negative green bond premium of -6.94 bps. Nevertheless, when the comparison is restricted to green bonds from the same issuing firm and issue year, no notable price discrepancy was discerned.¹⁴ Flammer (2021)²⁶ analyses corporate green bonds and compares the yields of these green bonds with the most comparable conventional bonds of the same issuer, using the matching method as in Larcker & Watts (2020)⁴⁰. She concludes that there is no green bond premium, as she could not find any statistically relevant differences between the yields of green and conventional bonds.²⁶ These results are consistent with those of Larcker & Watts (2020)⁴⁰, and contradict the findings of Gianfrate & Peri (2019)³⁹ on corporate green bonds. Caramichael & Rapp (2024)¹⁰ study also the corporate green bond market and find a negative premium between -3 bps and -8 bps on the primary market.

Table 3: Overview of Studies on the Existence of a Green Bond Premium, own illustration

Furthermore, other studies are analysing the factors and drivers that influence the green bond premium alongside the existence of the premium. In a study conducted by Agliardi & Agliardi (2019)⁴¹, the impact of green bond volatility, parameters for green technologies and sustainability, and tax rates on the greenium is examined. The results show “that the greenium is increased if asset volatility increases, the parameters governing the green technology and the sustainability advantage increase, and corporate tax rates are decreased” (Agliardi & Agliardi, 2019, p. 622)⁴¹. Fatica et al. (2021)³⁶ analyse the different types of issuers and find that both supranational institutions and non-financial corporates show a yield difference when issuing green bonds. The difference is -80 bps for green bonds issued by supranational institutions and -22 bps for green bonds issued by non-financial corporates. They consider that the high yield difference on green bonds issued by supranational institutions is due to their high reputation. However, they identify no statistically significant yield differences for green bonds issued by financial companies. They assume that this has to do with the fact that it is difficult for financial corporates to link green bonds directly to specific projects.³⁶ Kapraun et al. (2021)⁴² also document that the green bond premium shows a high variance across the types of issuers and currencies. The negative premium is particularly higher for green bonds issued by public institutions and for green bonds issued in EUR.⁴² Hyun et al. (2020)²⁸ initially find no evidence of a positive or negative green bond premium in their study. However, after filtering the green bonds with an independent reviewer or CBI certification, they observe a reduction in the green bond premium of 6 to 15 bps.²⁸ The following study by Hyun et al. (2021)²⁷ investigates the impact of green labels on the price relative to comparable green bonds without a green label. The results show that the yield of green bonds with labels is 24 to 36 bps lower than the yield of green bonds without labels.²⁷ In addition, the findings of Kapraun et al. (2021)⁴² indicates that certified green bonds of corporates offer a considerably lower yield, approximately 24 bps below that of comparable conventional bonds.⁴² Allman & Lock (2024)⁴³ also analyse the impact of an external review on the green bond premium. Their results show that the external review does not have a significant impact on the green bond premium. They conclude, that externally reviewed green bonds are not issued with lower yields compared to comparable conventional bonds.⁴³ These results are in contrast to the results reported by Kapraun et al. (2021)⁴² and Hyun et al. (2020)²⁸. Li et al. (2020)⁴⁴ study the factors that influence the pricing of a green bond, in particular the interest cost. In their study, the researchers focus on the Chinese market for green bonds. In conclusion, their findings indicate “that certified green bonds with higher credit ratings or higher CSR scores have lower yield spreads and interest costs” (Li et al., 2020, p. 2687)⁴⁴. Furthermore, they argue that the advantages of certification outweigh the expenses associated with the certification process.⁴⁴

Overall, it is not possible to draw a universally valid conclusion regarding the existence of a green premium. A variety of factors influence the existence and amount of a negative green bond premium, including the timing of the issue, the type of issuer and the choice of an external review. Larcker & Watts (2020)⁴⁰ argue that the significant discrepancies in the findings of prior studies regarding the existence and amount of a green bond premium are “the result of methodological design misspecifications that produce biased estimates” (Larcker & Watts, 2020, p. 4)⁴⁰.

Other studies analyse the impact of the issue or announcement of a green bond on the stock market. Tang and Zhang (2020)¹⁴ study the reaction of the stock market to the announcement of a green bond in their study. They define the announcement day as day 0. The results of the event windows of [-10,10] days show a positive stock market reaction with a cumulative abnormal return (CAR) of 1.39 %, while a CAR of 1.04 % is observed for the event windows of [-5,10] days. Subsequently, they analyse which types of issuers are most likely to experience a stock market reaction to the issuance of a green bond. They differentiate between corporates and financial institutions. The results of the study show that the reaction of the stock market to the issue of green bonds by corporates is statistically significant, while the reaction in relation to financial institutions is not significant.¹⁴ In addition, Flammer (2021)²⁶ was able to prove that the stock market reacts statistically significant and positively to the announcement and issue of a green bond. Day 0 is defined as the announcement day, whereby a positive reaction of the stock market is observed in the event window of [-5,10] days with an average CAR of 0,49%. Her findings demonstrate that the stock market reaction is more pronounced for certified green bonds and first-time issuers, which corroborates her signalling argument.²⁶ Wang et al. (2020)⁴⁵ also observe an abnormal and statistically significant increase in stock returns during a two-day period following the announcement of a green bond issue, as evidenced by their analysis of the green bond market in China. The authors posit that the stock market responds more favourably to the announcement of a green bond issue than to the announcement of a conventional bond issue.⁴⁵

Furthermore, the impact of issuing green bonds on the ownership structure of the green bond issuer is analysed in the studies of Tang & Zhang (2020)¹⁴ and Flammer (2021)²⁶. The study conducted by Tang and Zhang (2020)¹⁴ finds that institutional ownership raises by 7.9% after a green bond issue compared to a conventional bond. They also analysed whether there are differences between domestic and foreign institutional investors. The findings demonstrate that only domestic investors exhibit a notable increase in their holdings in companies when green bonds are issued with an observed rise of 7.6% and 8.5%, respectively. Conversely, no significant change in holdings was observed among foreign investors.¹⁴ In her study, Flammer (2021)²⁶ analysed the ownership structure of US companies and concluded that the increase in institutional ownership is statistically insignificant. However, the study shows that the share of both long-term and green investors increased significantly when a green bond was issued. The share of long-term investors increased by 1.8% – 2.2%, while the share of green investors increased by 2.9%.²⁶ To summarise, the findings on the ownership structure indicate that the introduction of a green bond leads to increased investor interest and the development of a more diverse investor base.^14,26

2.2.2      Ecological Impacts

Another academic debate exists about the impact of green bonds on environmental performance of the issuing companies. 

The majority of the studies present in this context analyse the impact of green bonds on carbon reduction. Flammer (2020)⁴⁶ can demonstrate a significant reduction in CO₂ emissions of 27.7% in connection with the issue of green bonds by public companies. In addition, Flammer (2021)²⁶ documents a 12.9% reduction in CO₂ emissions associated with corporate green bonds. Fatica & Panzica (2021)⁴⁷ also investigate whether green bonds contribute to a reduction of CO₂ emissions at company level. Their results suggest that the issuance of green bonds leads to a reduction in CO₂ emissions. In their study, Garcia et al. (2023)⁴⁸ observe that issuers with a higher environmental rating, lower CO₂ emissions and a sustainable committee show a greater propensity to issue green bonds. Furthermore, the study reveals that two years after the issuance of a green bond, there is no observable increase in environmental performance and a reduction in CO₂ emissions. However, the authors suggest that a two-year period may be relatively short to discern significant environmental impacts of the financed projects.⁴⁸ ElBannan & Löffler (2024)⁴⁹ note that CO₂ emissions do not experience any significant change shortly after the green bond is issued. Nevertheless, they observe a notable decline in CO₂ emissions for an issuance that occurred over two years ago.⁴⁹ In contrast, Ehlers et al. (2020)⁵⁰ find no significant evidence that the issuance of green bonds has any impact on reducing the carbon intensity of the issuing companies.

Chang et al. (2022)⁵¹ study the relationship between green bonds and the ecological footprint in the following ten countries: USA, Germany, China, France, UK, Sweden, Netherland, Canada, Japan, Spain. In the majority of countries, they identify a negative correlation between green bonds and ecological footprint. In eight out of the ten countries under consideration, the introduction of green finance has a positive impact on environmental quality. With regard to the relationship between green bonds and the ecological footprint, only Spain and Canada show results that differ from the other countries.⁵¹

In addition to her analysis on a reduction of CO₂ emission, Flammer (2020)⁴⁶ and Flammer (2021)²⁶ also study the impact on the environmental rating and her results show that the environmental rating increases by 8,8%⁴⁶ and 8.7 %²⁶ in the long run after issuing a corporate green bond. According to Flammer (2021)²⁶, these results in terms of reduced CO₂ emissions and improved environmental ratings are consistent with her signalling argument and contrary to her greenwashing argument.

Wang et al. (2022)⁵² examine Chinese A-share companies over the period from 2007 to 2020. The researchers study the effect of green bond issuance by these companies on green innovation and technologies. The findings of the study indicate that the issuance of green bonds has a considerable, beneficial impact on companies’ green innovation, as it assists in the alleviation of potential financing challenges.⁵²

The question of whether green bonds constitute authentic green investments or merely greenwashing instruments is addressed by Shi et al. (2023)⁵³. They analyse the effects of issuing green bonds on the quantity and quality of green innovations of the issuing company. The authors examine the growth of Chinese A-share companies, as previously investigated by Wang et al. (2022)⁵², over the period from 2013 to 2020. The results demonstrate that the issuance of green bonds result in a notable increase in the number of patents, with an observed increase of 59.48%. This indicates a significant increase in the number of green innovations. Despite this increase in quantity, they find no observable improvement in the quality of these innovations. The findings of the study imply that green bond issuance of companies, which solely affects the quantity but not the quality of green innovations, may potentially represent a form of greenwashing.⁵³

3        Practical Implementation

3.1       Green Bond Standards

Despite the rapid expansion of the green bond market, there remains a lack of agreement on the definitions, guidelines, and green taxonomy.¹⁴ In general, there are two widely accepted green bond standards in the market: the Green Bond Principles (GBP) and the Climate Bond Standard (CBS).⁵⁴ In November 2023, the European Green Bond Standard (EuGBS) was published, which could be a relevant standard in the future. In addition, there are a number of different taxonomies for defining green projects. Several countries and regional organisations such as the EU, have established guidelines for green bonds and task forces such as the Technical expert group on sustainable finance (TEG).⁵⁴

3.1.1      Green Bond Principles

One of the main drivers of the positive development of the green bond market was the publication of GBP in 2014.^7,19With the introduction of the GBP, green bond issuance grew strongly, with governments and private institutions entering the market and playing an increasingly significant role.¹⁹ The GBP represent voluntary process guidelines regarding the issuance of green bonds, developed by the ICMA.¹⁵ The ICMA, which is a not-for-profit association, currently has more than 620 members who are engaged in all of the international debt markets across 68 jurisdictions around the world.⁵⁵Their members include “private and public sector issuers, banks and securities dealers, asset and fund managers, insurance companies, law firms, capital market infrastructure providers and central banks” (ICMA, 2024)⁵⁵. The GBP were the first voluntary guidelines on the market to achieve a high level of acceptance among market participants and have been continuously revised.²⁹ The latest version of the GBP was published in 2022. 

In order to ensure alignment with the GBP, four key components must be considered, namely (1) Use of Proceeds, (2) Process for Project Evaluation and Selection (3) Management of Proceeds and (4) Reporting.¹⁵ The integration of these components has led to a notable emphasis on transparency as a principal strategy for upholding the integrity of the green bond market.²⁵ In order to increase transparency in the market, the GBP have formulated the following recommendations: the establishment of Green Bond Frameworks and the introduction of External Reviews.¹⁵

3.1.1.1      Use of Proceeds

A fundamental aspect of the green bond is that the proceeds are allocated to eligible green projects that have a clear benefit for the environment.¹⁵ According to ICMA (2022a)¹⁵, documentation of the Use of Proceeds to finance or refinance green projects is required for a bond to be classified as green. There are numerous eligible green projects, which have been grouped in the GBP into several broad project categories. Table 5 shows these project categories with a brief explanation of which projects are included according to ICMA (2022a)¹⁵. However, ICMA (2022a)¹⁵ points out that there are more projects that are not listed in the table, but are nevertheless eligible for funding in the green bond market. In particular, the GBP refer to numerous different national and international initiatives that have created taxonomies and nomenclatures. Such taxonomies assist issuers in determining which projects are considered green and eligible.¹⁵

Table 4: Eligible Green Projects, ICMA (2022a, p. 4-5)¹⁵ 

Categories	Eligible Green Projects
Renewable energy	including production, transmission appliances and products
Energy efficiency	such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances and products
Pollution prevention and control	including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy/ emission-efficient waste to energy
Environmentally sustainable management of living natural resources and land use	including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart farm inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes
Terrestrial and aquatic biodiversity	including the protection of coastal, marine and watershed environments
Clean transportation	such as electric, hybrid, public, rail, non-motorised, multi-modal transportation, infrastructure for clean energy vehicles and reduction of harmful emissions
Sustainable water and wastewater management	including sustainable infrastructure for clean and/or drinking water, wastewater treatment, sustainable urban drainage systems and river training and other forms of flooding mitigation
Climate change adaptation	including efforts to make infrastructure more resilient to impacts of climate change, as well as information support systems, such as climate observation and early warning systems
Circular economy adapted products, production technologies and processes and/or certified eco-efficient products	such as the design and introduction of reusable, recyclable and refurbished materials, components and products; circular tools and services
Green buildings	that meet regional, national or internationally recognised standards or certifications for environmental performance

3.1.1.2      Process for Project Evaluation and Selection

The second component, the project evaluation and selection process, requires issuers to provide investors with detailed information on the environmental and sustainable objectives of their green projects.¹⁵ In addition, the issuer’s process for allocating green projects to eligible green project categories should be clearly communicated to investors, and the issuer have to provide supplementary details on the identification and administration of social and environmental risks pertinent to the specified projects.¹⁵ Furthermore, ICMA (2022a)¹⁵ encourages the issuer to integrate environmental sustainability information into the principle strategies and procedures of the company or organisation. Information on compliance with official taxonomies, market-based green standards and related certifications referenced in project selection should also be disclosed. Moreover, the issuer is encouraged to implement a measures, such as include trade-off analyses and appropriate monitoring, for the reduction of social and environmental risks with regard to the project in question. ¹⁵

3.1.1.3      Management of Proceeds

As part of the management of the proceeds, it should be ensured that “The net proceeds of the Green Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner” (ICMA, 2022a, p. 6)¹⁵. In order to ensure that the proceeds are used exclusively for financing eligible green projects, a formal internal process is in place by the issuer.¹⁵ The management of the proceeds must be transparent, allowing for tracking and verification.¹⁹ Therefore, the balance of net proceeds should be modified on a periodical basis as long as the green bond is outstanding.¹⁵ In addition, the GBP recommends that the allocation of proceeds should be audited by either an external auditor or a third party to verify the internal tracking and allocation of proceeds generated from the issuance.¹⁵

3.1.1.4      Reporting

According to the ICMA (2022a)¹⁵, reporting is the fourth key component, with issuers providing current information on the use of proceeds. Until the allocation is complete, annual reporting must be prepared and regularly updated in the event of material changes or developments. The aim is to increase transparency through open communication. According to GBP, annual reporting should give an overview and brief description of the projects that have received the proceeds of the green bonds, including the corresponding amounts received and their expected impact. Furthermore, the publication of an impact report by the issuer is recommended, in which the positive environmental implications of the projects financed by green bonds are set out.¹⁵

3.1.1.5      Green Bond Frameworks

In order to ensure transparency and accountability, ICMA (2022a)¹⁵ recommends that issuers provide a detailed explanation of the key characteristics of their green bond or green bond program in the context of the four core elements of the GBP in a Green Bond Framework. The publication of the document on the issuer’s website is an appropriate method to guarantee convenient access for investors and stakeholders. Furthermore, the Green Bond Framework should include information on the issuer’s strategic orientation with regard to sustainability and the associated objectives. It should also list all taxonomies, green standards and certifications that the issuer considers during the process.¹⁵

Chapter 4.2 presents two case studies on the implementation of Green Bond Frameworks, with the objective of offering a practical insight.

3.1.1.6      External Reviews

In addition to the Green Bond Framework, the ICMA (2022a)¹⁵ also formulates external reviews as a key recommendation in the GBP. The issuer of a green bond is recommended to engage one or more external auditors to review and confirm that the green bond complies with the GBP and its four core components prior to being issued. In addition, it is also recommended that the use of proceeds is verified by an external auditor or other third party after issuance to ensure that the green bond proceeds are actually used for eligible green projects.¹⁵ The issuer has several options for having its green bond audited and evaluated.⁵⁶ The scope of the review can vary, for example, the green bond framework, an individual green bond or even just the use of the proceeds of the green bond can be reviewed by an independent third party.⁵⁶ The ICMA (2022b)⁵⁶ refers to four different types of external review, namely the second party opinion, verification, certification and green bond scoring/rating. A detailed explanation of these categories can be found in the “Guidelines for Green, Social, Sustainability and Sustainability-Linked Bonds External Reviews” provided by the ICMA (2022b)⁵⁶.

3.1.2      Climate Bond Standard

The Climate Bonds Standard (CBS) and Certification Scheme is another well-known and widely used standard in the green bond market alongside the GBP. The CBS and Certification Scheme was launched in 2012 by the CBI, a non-profit organisation whose objective is to mobilise capital for climate action on a global scale.^57,58 The CBS and Certification System initially concentrated on the certification of green bonds and debt instruments.⁵⁹ Since its inception, over USD 300 billion of Use of Proceeds green instruments were certified in accordance with the CBS.⁵⁸ In the meantime, the standard has been expanded to include the certification of assets, entities and sustainability-linked debt instruments.⁵⁹

The CBS and the certification system are based on the comprehensive integrity standard of the GBP.⁵⁸ According to the CBS, the requirements for use-of-proceeds certification are divided into pre-issuance and post-issuance requirements.⁵⁸According to Ehlers & Packer (2017)¹⁹, the CBS defines sector-specific eligibility criteria, in contrast to the GBP, which are more general in nature. The criteria are used to evaluate the low-carbon value of an asset and its eligibility for issuance as a green bond.¹⁹ In addition, the CBS requires the publication of a Green Finance Framework before or at the same time of the issuance and a disclosure documentation.⁵⁸

With regard to certification, it must be ensured that the proceeds of the green bond are allocated to projects that fully comply with the relevant sector-specific criteria of the CBS.⁵⁸ The sector criteria are a subset of the Climate Bond Taxonomy, which divides eligible projects into eight categories.⁶⁰ These are: Energy, Transport, Water, Buildings, Land Use & Marine Resources, Industry, Waste & Pollution Control and ICT.⁶⁰ The share of projects that do not meet these criteria may not exceed 5%.⁵⁸ However, these 5% must fulfil other requirements, such as falling under the green project categories of the ICMA GBPs.⁵⁸ In contrast to the GBP, the issuers are obliged under the CBS to prepare a Green Bond Framework before issuing the green bond and to publish an allocation report regularly after issuance.⁵⁸

According to CBI (2024c)⁵⁸, there are four types of certification, namely pre-issuance certification, post-issuance certification, ongoing certification and programmatic certification. For the pre-issuance certification of a green bond the issuer must fulfil the pre-issuance requirements. In the case of subsequent certification, post-issuance requirements must also be met. In addition, a verification by an approved verifier is mandatory in the certification process. Those seeking ongoing certification must fulfil the requirements of annual reporting, which must be presented as part of a public disclosure.⁵⁸

3.1.3      European Green Bond Standard

In recent years, the European Commission has put forward comprehensive plans to mobilise public and private financial resources for green investments as part of the European Green Deal.⁶¹ As stated by the European Commission (2021)⁶², the objective of the introduction of the European Green Bond Standard (EuGBS) is to establish a standard with high quality for companies and public authorities. This should enable the aforementioned entities to use green bonds to acquire capital while at the same time ensuring the implementation of sustainable requirements. Furthermore, investors should be protected from greenwashing and the EuGBS should contribute to increased transparency on the green bond market.⁶²

According to the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (n.d.)⁶³, the political timeline for the EuGBS is as follows. The first step towards an EuGBS was taken in 2016 with a study on the potential of green bond to finance climate-friendly projects. In 2019, the TEG published a report on the EuGBS. In 2020, the TEG presented its final report on an EuGBS, which was followed by the Commission’s decision to propose an EuGBS. A legislative proposal for an EuGBS was published on 6 July 2021, where the EuGBS is defined as a voluntary standard. Political agreement on the EuGBS was reached on 28 February 2023 and the EuGBS was published in the Official Journal of the European Union on 30 November 2023.⁶³

According to the Regulation (EU) 2023/2631⁶⁴, the basis for the EuGBS is the European Taxonomy, which defines requirements and criteria for environmentally sustainable and economic activities. It is mandatory for a EuGB to allocate all of its proceeds to economic activities that comply with the taxonomy requirements (Article 4(1)). In accordance with Article 5(1), the issuers are permitted to use up to 15% of the proceeds for economic activities that fulfil the requirements of the taxonomy, with the exception of the technical screening criteria, provided that such criteria do not exist at the time of issuance. However, these 15% must fulfil other requirements, such as align with other recognized international guidelines or criteria. In order to enhance transparency, the issuer is required to provide a European Green Bond factsheet, which must undergo a pre-issuance review and receive a positive external review (Article 10). According to Article 22(1) the external reviewers of EuGB are required to register with ESMA. In addition, the issuers have to publish a prospectus for their green bonds (Article 14(1)). In contrast to the GBP, the issuers are required to prepare an annual allocation report (Article 11(1)) and also an impact report after full allocation of the proceeds (Article 12(1)).⁶⁴

3.2       Examples of Green Bond Frameworks

As previously indicated in section 4.1.1.5, green bond frameworks represent a central component of the communication process between issuers and investors, as well as other relevant stakeholders. They facilitate transparency in the green bond market. Furthermore, the associated external reviews, which assess the aforementioned content of the green bond framework, are of crucial importance. In this context, two case studies are presented, illustrating the practice of issuers creating a green bond framework and subsequently undergoing an external review of the framework.

3.2.1      “Green Bonds – Made by KfW” Framework

KfW is a prominent global promotional bank and working on behalf the Federal Republic of Germany to advance the economic, social, and environmental well-being of communities worldwide since 1948.⁶⁵ In contrast to other banking institutions, it has neither bank branches nor customer deposits.⁶⁵ Instead, it refinances the majority of its promotional business activities through the international capital markets.⁶⁵

KfW’s promotional financing reflects current global developments, such as climate change and environmental protection.⁶⁶ In the year 2023, it provided a total promotional volume of EUR 111.3 billion, with 33% of that amount directed towards climate and environmental protection measures.⁶⁵ It operates in accordance with the United Nations 2030 Agenda and contributes to the achievement of the Sustainable Development Goals.⁶⁵ KfW has set itself the goal of helping to protect the environment and combat climate change.⁶⁶ To this end, it aims to achieve “an environmental commitment ratio of 38% of its total annual funded business volume” (KfW, 2024b, p.3)⁶⁶. KfW is convinced that green bonds are a suitable financial instrument for achieving these goals.⁶⁶ It has therefore acted as an issuer on the green bond market since 2014 and as an investor since 2015.⁶⁶

In a recent report by the CBI (2024b)²³, KfW was identified as the leading non-sovereign issuer, with an issuance of USD 14 billion in 2023. Additionally, KfW was positioned as the fifth-largest issuer of green bonds in 2023, among the top ten aligned green issuers. In its report, the CBI identifies the “Green Bonds – Made by KfW” framework as an exemplar of best practice in the development of frameworks for green bonds.²³  

In 2014, KfW published the first version of its “Green Bonds – Made by KfW” Framework. This was updated in 2019 and 2022 and the latest version has been in force since 1 January 2024. According to KfW (2024b)⁶⁶, the framework aligns with the 2021 edition of the GBP with the June 2022 Appendix and its four key components and  recommendations. Furthermore, KfW is engaged in the process of adapting its framework, loan programmes and project financing to align with the EU Taxonomy and its associated criteria. Additionally, the development of the EU Green Bond Standard (EuGBS) is being monitored.⁶⁶

The “Green Bonds – Made by KfW” Framework publishes by KfW (2024b)⁶⁶ is structured as follows: Firstly, KfW’s overarching objectives and strategy are explained. This is followed by a description of the development and alignment of the framework regarding the GBP and the EU taxonomy. The structure of the framework follows the GBP and its core components, first describing the use of proceeds, then the process for project evaluation and selection, followed by the management of proceeds and reporting. Finally, the external review process by KfW is mentioned. Reference is made to the Second Party Opinion (SPO) on the KfW framework by Sustainalytics, which is published on the KfW website. It also refers to other websites and documents where interested parties can find out more about KfW’s green funding and sustainability.⁶⁶

According to KfW (2024b)⁶⁶ and its use of proceeds, eligible projects of the KfW are allocated to five eligible categories. These include the following areas: I. renewable energy, II. green buildings, III. clean transportation, IV. biodiversity and V. corporate investments with substantial contribution to climate change mitigation. The fifth category corresponds to GBP categories of renewable energies, energy efficiency, clean transportation, sustainable water and wastewater management and pollution prevention and control. Within each of the above categories, KfW lists first those financing programmes that are eligible and meet the specified criteria. The following sections outlines the details and green eligibility selection criteria, which list the included and excluded project types. The environmental objectives associated with the EU taxonomy are then presented. This is followed by a comparison of the activities with the substantial contribution criteria of the EU Taxonomy. Finally, the Sustainable Development Goals (SDG) adopted by the United Nations are listed, which correspond to the respective category.⁶⁶

According to the Second Party Opinion (SPO) of Sustainalytics (2023)⁶⁷, the Green Bond Framework and all of the eligible categories of the KfW are aligned with the GBP 2021. As part of the alignment of the framework with the EU Taxonomy, Sustainalytics identified a total of 78 activities that can be allocated to the use of proceeds categories. Sustainalytics is of the opinion that 63 of these activities are fully aligned with the technical screening criteria of the EU Taxonomy, while seven activities are partially aligned and eight activities are not aligned.⁶⁷

3.2.2      E.ON Green Bond Framework

The E.ON Group is a company headquartered in Essen, Germany. It is one of the largest players in the European energy market, particularly in the areas of energy network and energy infrastructure operations.⁶⁸ The group has about 75,000 employees and serves more than 47 million customers.⁶⁸ E.ON aims to make a contribution to sustainability and climate protection and to support the transition to a sustainable energy system in Europe.⁶⁸ In the Sustainable Debt Global State of the Market Report 2022, published by the CBI (2023)⁶⁹, E.ON was ranked sixth among the top green non-financial corporate issuers of 2022. The total volume of green bonds in 2022 amounted to USD 2.6 billion, with the company carrying out three transactions.⁶⁹ In a press release dated 08.01.2024, E.ON (2024)⁷⁰ announced the successful issuance of two green bonds tranches, with a total value of EUR 1.5 billion, at the beginning of 2024. The funds raised will be used to finance or refinance green and sustainable projects in accordance with the Green Bond Framework established by E.ON, thereby satisfying a significant part of the financing requirements for 2024. The issuance of the green bond was met with considerable interest from investors.⁷⁰

The Green Bond Framework of E.ON (2021)⁷¹ is structured as follows: 

The initial section of the framework by E.ON (2021)⁷¹ outlines the corporate strategy for achieving a sustainable future, the objective of carbon neutrality by 2040 and the rationale behind the issuance of green bonds. E.ON recognises that promoting sustainability in the energy sector plays a central role in efforts to tackle the challenges of climate change. E.ON is pursuing a leading role in climate protection and has defined correspondingly ambitious climate targets. The objective is to reduce “Scope 1 and 2 emissions by 75% by 2030 and by 100% by 2040” (E.ON, 2021, p.1)⁷¹, while E.ON is aiming to reduce “Scope 3 emissions by 50% by 2030 and by 100% by 2050” (E.ON, 2021, p.1)⁷¹. In accordance with the GHG Protocol, published by the World Resources Institute and the World Business Council for Sustainable Development (2004)⁷², the company’s direct emissions are categorised as Scope 1 emissions. Indirect emissions generated outside the company but consumed by the company are classified as Scope 2 emissions. Finally, other indirect emissions are categorised as Scope 3 emissions.⁷² In order to attain these objectives, E.ON issues green bonds, which are employed for the purpose of financing or refinancing activities that serve to mitigate climate change.⁷¹

The second part of the document constitutes the central core of the Green Bond Framework by E.ON (2021)⁷¹. The structure is based on the GBP. The document commences with an enumeration of the green projects for which the proceeds are earmarked. E.ON (2021)⁷¹ categorises the green projects, financed or refinanced with the green bonds proceeds, into four main categories: Electricity Networks, Renewable Energy, Energy Efficiency and Clean Transportation. A list of green assets and capital expenditures that are eligible for funding is provided for each category, accompanied by a description of the corresponding funding criteria. Furthermore, the SDG adopted by the United Nations are listed, which correspond to the respective category. Moreover, the corresponding EU Economic Activities and ICMA Green Project Categories are listed under each eligible category of E.ON.⁷¹ Subsequently, the process for selection of green projects and the environmental impact are described. Furthermore, the management of the use of proceeds and the annual reporting process are presented. A report on the allocation of net proceeds will be published by E.ON on an annual basis. Where possible, an impact report will also be published, which presents a detailed account of the environmental impact of the eligible green portfolio. In addition, the external review is presented, in which E.ON has both a pre-issuance verification and a post-issuance verification conducted by independent and external verifiers. As part of the pre-issuance verification process, the framework is subjected to a review and verification to ascertain its alignment with one or more standards on the green bond market, such as the GBP or EuGBS. Subsequent to the issuance of the green bond, a verification of the allocation report is conducted as part of the post-issuance verification.⁷¹

The SPO of Sustainalytics (2021)⁷³ has verified that E.ON’s Green Bond Framework aligns with the four core components of the GBP 2021. In addition, the alignment of the framework with the EU Taxonomy is confirmed, with all activities under the eligible categories are aligned with the Technical Screening Criteria in the EU Taxonomy.⁷³

3.3       Best-Practice for Issuing a Green Bond

As the green bond market expands, the establishment of clear and consistent guidelines for the issuance of green bonds assumes greater significance. For new issuers, they can be significant assistance and a good source of support when issuing a green bond for the first time. Three guidelines from different initiatives will be presented and compared in the following sections.

One source of guidance is the “Green Bond Handbook: A Step-by-Step Guide to Issuing a Green Bond ” of the International Finance Corporation (2020)⁷⁴. The handbook provides comprehensive instructions for the issuance of green bonds. Developed by the Green Bond Technical Assistance Programme (GB-TAP) of the International Finance Corporation (IFC) in 2020, the handbook aims to facilitate the growth of the green bond market, particularly in emerging markets. To this end, it provides issuers in emerging markets with guidance and an overview of best practices from international experience in the field of green bond issuance. This handbook has been designed for financial institutions in emerging markets that are involved in issuing green bonds. It provides guidance for financial institutions, particularly those issuing green bonds for the first time, on the successful preparation and issuance of such bonds.⁷⁴

The initial chapter of the handbook by IFC (2020)⁷⁴ offers a definition of the term “green bonds” in the context of GBP. Furthermore, it presents an overview of the process of issuing green bonds, including a summary of the principal steps involved. It also describes how issuers can use the handbook correctly. Following the initial chapter, the handbook is divided into two parts. The first part is dedicated to the background and theoretical aspects of issuing green bonds, whereas the second part deals with the practical implementation, namely the design and issuance of a green bond. The first part is dedicated to explaining the rationale behind the issuance of green bonds. Furthermore, it delineates the organisational prerequisites for issuers, emphasising both internal and external structures. As part of the internal organisation, the formation of a green bond project team is first discussed, including the necessary members and resources. Thereafter, the external resources and their pivotal role in the issuance of green bonds are examined, with a particular emphasis on the function of underwriters and external auditors. The market launch timeline is also discussed, although precise timescales are not possible to provide given the numerous factors that must be considered. However, preparation and implementation are estimated to require between eight and twelve weeks. Finally, the handbook presents the rationale behind the creation of a Green Bond Framework, which is a crucial document in this context. The second part of the handbook focuses on the practical aspects of structuring and issuing a green bond. The structuring of the Green Bond is based on the four core components of the GBP, which are presented in section 4.1. The handbook offers an overview of the most effective practices in accordance with the GBP. Finally, the handbook presents a final checklist for the issuance of the green bond, which serves as a guide for issuers. It also provides an overview of the marketing and distribution aspects of the green bond, as well as the issuer’s obligations to report on the allocation and impact after the issue.⁷⁴

Another guideline for issuing green bonds is “Detailed Guidance for Issuing Green Bonds in Developing Countries” developed by Asian Development Bank (2021)⁷⁵. The objective of this guideline is to successfully support issuers and their advisors in the issuance of green bonds. This includes providing comprehensible guidance that explains the process and the key aspects. The guide exclusively addresses use-of-proceeds bonds, which encompass green bonds, climate bonds, social bonds, and sustainability bonds, but excludes sustainability-linked bonds. The guide begins with a concise overview of the evolution of the green bond market within the Association of Southeast Asian Nations (ASEAN). This is followed by a brief summary of the guide and an overview of the labelling process. The individual steps of the labelling process, shown in Figure 5, are described in more detail in the following sections of the guideline. Relevant examples and links to further important information for issuers are provided for each step.⁷⁵

The third guideline, entitled “Green Bonds for Climate Resilience” and developed by the CBI et al. (2021)⁷⁶, is a guide for issuers and was prepared by the CBI in cooperation with the European Bank for Reconstruction and Development (EBRD) for the Global Center on Adaptation (GCA). The GCA is an international organisation with the aim of working on a climate-resilient future, supporting locals by providing adaptation solutions. The guide offers practical advice for all types of issuers regarding the issuance of green bonds. The guide is structured into three chapters. The initial section comprises an introductory chapter, wherein they outline the rationale and aims that underpin the creation of the guide. Subsequently, a definition and description of climate resilience investments is provided, offering insight into the current status and financing options for climate change resilience in the green bond market. The guide offers practical advice for all types of issuers regarding the issuance of green bonds. The second chapter presents a seven-step guide, which, according to CBI et al. (2021)⁷⁶, explains the issuance of green bonds in line with international best practice. Figure 6 presents the seven individual steps. Furthermore, they provide a summary of the individual steps of the guidelines in conjunction with the corresponding frequently asked questions (FAQs) on the climate-resilient aspects of their emissions and their brief answers in a table. Chapter 3 provides a more detailed analysis of the climate-resilient aspects by addressing the FAQs listed in the table in greater depth.⁷⁶

The following passage examines the parallels and divergences between the three guidelines, as shown in Table 6. There are discrepancies in the guidelines with respect to the intended audience, as illustrated in the table. The handbook of the IFC (2020)⁷⁴ is primarily based on the ICMA’s GBP, although alternative criteria may also be employed for project selection, including the CBI taxonomy or the EU taxonomy. In contrast, the other two guidelines do not focus on a single standard. The guide published by the ADB (2021)⁷⁵ presents five different standards, classified according to their level of complexity. Similarly, CBI et al. (2021)⁷⁶ offer a number of options for the selection of project evaluation criteria, which are particularly suitable for screening investments that strengthen resilience to climate change. Each guideline comprises the establishment of a Green Bond Framework, an external review and an impact reporting, in accordance with best-practice procedures. This demonstrates the relevance of the aforementioned three aspects, even if the GBP only makes recommendations in this regard. Enhancing transparency within the green bond market is thereby facilitated. Both the IFC’s Handbook and the Guide of the ADB provide comprehensive explanations of the individual steps that must be taken to successfully issue green bonds. The Guide of the CBI et al. (2021)⁷⁶, on the other hand, addresses frequently asked questions, particularly in the context of climate resilience. In summary, each of the three guidelines presented is designed to provide issuers with practical assistance, with the objective of facilitating the process of issuing a green bond and demonstrating best practices based on international experience.

Table 5: Comparison of the three Guidelines, own illustration

3.4       Drivers and Barriers for Implementation

There are various drivers that motivate both issuers and investors to enter the green bond market. As previously outlined in section 3.1.3, there are numerous incentives and rationales for both parties to issue or invest in green bonds. 

For issuers, green bonds serve as a marketing instrument to enhance their reputation and signal that the company acts in a socially responsible manner.^30,54 Additionally, green bonds are utilized to diversify and broaden the investor base, a phenomenon that has been empirically validated by studies conducted by Flammer (2021)²⁶ and Tang & Zhang (2020)¹⁴(see section 3.2.1).⁵⁴ The use of green bonds facilitates enhanced communication between issuers and investors, thereby reinforcing the connection between them.^11,30,54 Furthermore, the implementation of green bonds can serve to illustrate that ESG considerations are firmly established within the organisation.³⁰ In addition, there is a possibility of oversubscription of green bonds, due to the fact that investor demand for green investment alternatives exceeds the current supply.^14,30,77 This could represent a more cost-effective alternative to conventional bonds for those issuing them.⁴¹

A potential advantage for investors is that by allocating capital to green bonds, they can integrate ESG considerations into their investment strategy.^13,30 Furthermore, the investment portfolio can be diversified by allocating capital to green bonds, which serves to mitigate risk.^34,35 Another advantage for investors who choose to invest in green bonds is the greater transparency regarding the use of the proceeds.^30,54 This transparency enables investors to obtain additional information, which is an advantage.³⁰

Nevertheless, there are some barriers that prevent both issuers and investors from implementing green bonds.

One potential challenge is the absence of a unified definition of green bonds and a uniform standard.^30,54,78 The green bond market is characterised by the presence of several voluntary standards, including the GBP, the CBS, and the EuGBS (see section 4.1). Moreover, there is no uniform international classification of green and eligible projects and project categories.⁵⁴ Another potential risk is the phenomenon of ‘greenwashing’, which can have adverse consequences for the reputation of both the issuer and investors.⁵⁴ Nevertheless, Flammer (2021)²⁶ and Jäger et al. (2021)⁵ identify challenges that render greenwashing by issuers in the context of green bonds more challenging and, consequently, reduce the potential for risk (see section 3.1.3.1). Moreover, the costs associated with the issuance of green bonds are typically higher than those of conventional bonds.^30,77 This is largely attributable to the additional transaction costs incurred in connection with various processes, including certification, monitoring, reporting, and the modification of internal procedures.^30,54 It is still unclear whether the additional costs can be offset by a financial benefit for issuers associated with green bond issuance compared to conventional bond issuance, as evidenced by a negative green bond premium.⁵⁴Chapter 3.2.1 provides an overview of some existing studies investigating the existence and amount of a green bond premium. However, no conclusions can be stated with certainty at this time.

4        Conclusion

The challenge of combating climate change and climate protection represents one of the most significant global issues of the 21st century. Initiating projects aimed at reducing greenhouse gas emissions and strengthening resilience to the effects of climate change is a crucial measure in addressing this challenge. In addition to the actions of state and supranational actors, the role of companies in this process is also vital, as they must reflect on their activities and develop sustainability strategies. The implementation of these projects requires a substantial level of financing, with green bonds being a key instrument in mobilising the necessary resources. 

In recent years, the market for green bonds has experienced significant growth. For those entering this market for the first time, it is of the great importance to gain an understanding of the differences between green bonds and conventional bonds. The use of the proceeds of green bonds is subject to the condition that they must be used for eligible green projects. Green bonds are also intended to ensure greater transparency on the market. Furthermore, the financial and environmental impact is crucial for the decision to issue a green bond or to invest in a green bond. In conclusion, it can be stated that green bonds offer financial advantages, which can be substantiated by relevant studies. The advantages of green bonds include diversification of the investor portfolio^34,35 and the issuer’s investor base^14,26. It may also be assumed that the announcement of the issue of a green bond could result in a positive reaction on the stock market.^14,26,45However, it is currently not possible to make any precise statements about the existence and amount of a possible greenium. In addition, the research situation regarding the risk of green bonds compared to conventional bonds is currently still limited. Moreover, the issuance of green bonds has been linked to positive ecological effects. Most of the studies observed a reduction in CO₂ emissions after a period of more than two years following the issue of the green bond.^26,46,47,49 Below this period, no significant changes in CO₂ emissions can be observed.^48,49

There are currently several voluntary standards available on the green bond market that have been developed to support issuers in financing sustainable green projects by issuing a green bond. In addition, the standards aim to increase transparency in the market. The most well-known and widely adopted standards are the GBP and the CBS. The EuGBS was also recently published, although further research is required to ascertain its market establishment and level of acceptance. Moreover, it can be stated that although the GBP only recommends the implementation of a green bond framework and an external verification process, both are essential for the creation of greater transparency in the market and can be regarded as best-practice. This becomes clear when the three guidelines presented are subjected to a closer analysis. The creation of a green bond framework, an external review and also impact reporting are essential components of any guideline relating to the issue of a green bond. 

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