Green Bonds
- Purpose: Green bonds are specifically designed to raise capital for projects that have a positive environmental impact, such as renewable energy, green buildings, and sustainable infrastructure.
- Use of Proceeds: Funds from green bonds are dedicated to financing or refinancing specific green projects. Examples include “use of proceeds” bonds, project bonds, and securitization bonds.
- Credit Risk: Green bonds typically carry the same credit risk as the issuer’s other debt obligations because they are often backed by the issuer’s entire balance sheet.
- Reporting and Verification: Issuers are expected to report on the use of proceeds and may obtain third-party verification to ensure the bonds meet environmental standards.
Sustainability-Linked Bonds
- Purpose: Sustainability-linked bonds are tied to the issuer’s overall sustainability performance, rather than being linked to specific green projects. The bond terms (e.g., interest rate) may change based on the issuer’s ability to meet predefined sustainability objectives.
- Use of Proceeds: The proceeds of sustainability-linked bonds can be used for general corporate purposes, not necessarily restricted to green projects.
- Key Performance Indicators (KPIs): These bonds are linked to specific sustainability KPIs, such as reducing carbon emissions or achieving waste reduction targets. Failure to meet these KPIs might result in higher interest rates.
- Credit Risk: The credit risk is generally similar to that of conventional bonds issued by the same entity, as the bonds are not tied to specific projects but to the issuer’s sustainability performance.
Summary:
| Feature | Green Bonds | Sustainability-Linked Bonds |
|---|---|---|
| Purpose | Finance specific green or environmental projects | Tied to issuer’s overall sustainability performance |
| Use of Proceeds | Dedicated to green projects | General corporate purposes |
| Credit Risk | Typically same as issuer’s other debt | Similar to conventional bonds |
| Reporting | Detailed reporting on project use of proceeds | Linked to sustainability KPIs and performance |
| Verification | Often requires third-party verification | Linked to issuer’s sustainability goals and metrics |
Overall, green bonds focus specifically on financing environmentally beneficial projects, while sustainability-linked bonds incentivize issuers to improve their broader sustainability performance over time.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-main-differences-between-green-bonds-and-sustainability-linked-bonds/
