Green bond
A green bond is a bond whose proceeds, or an equivalent amount, are applied exclusively to finance or refinance eligible projects with environmental benefits. Its defining feature is the restricted use of proceeds, supported by a stated project-selection process, proceeds management, and reporting under the issuer's chosen framework.
In simple terms
The issuer raises debt in the ordinary way but commits the funds to eligible green projects such as renewable energy, efficient buildings, clean transport, pollution prevention, or climate adaptation. Market principles recommend transparency about use of proceeds, project evaluation and selection, management of proceeds, and reporting. A green label does not make the issuer as a whole green, guarantee project impact, or eliminate credit risk. Investors therefore examine the framework, exclusions, allocation reporting, impact methods, external review, and applicable legal rules. Unlike a sustainability-linked bond, its defining feature is allocated proceeds rather than performance-linked terms.
Why it matters
Within sustainable finance, green bonds can connect investors with identifiable environmental spending and make allocation more transparent than unrestricted debt. Their credibility depends on robust eligibility, traceable proceeds, reporting, and proportionate claims. Weak definitions or reporting can finance questionable projects and create greenwashing even when the bond's legal payment obligations remain unchanged.
Example
For example, a city issues a bond to finance electric buses and energy-efficient public buildings. Its framework identifies eligible costs, tracks the allocated amount in its accounts, reports unallocated proceeds and project allocations, and provides environmental indicators with methods and limitations.
How it differs
Sustainability-linked bond
A green bond restricts proceeds to eligible environmental projects. A sustainability-linked bond can fund general purposes, while its financial or structural terms vary according to the issuer's performance against defined sustainability targets.
References
Current status
- As of
- Issuer
- International Capital Market Association
- Instrument or version
- Green Bond Principles, June 2025
- Status
- The June 2025 Green Bond Principles are the current ICMA voluntary process guidelines as of this date.
Applicability: The generic label is governed by the bond's terms, chosen framework, market practice, and applicable law; the optional European Green Bond designation has separate EU requirements.