Building Green, Financing Smart: A Guide to Green Bonds and Loans for Sustainable Transformation

As the impact of climate change becomes more severe every year, many business owners feel a responsibility to adopt sustainable practices or commit to reducing their carbon footprint. Whether your business is ready to expand, or you’re interested in starting a green business, you should know about green bonds and loans.

Financial institutions offer bonds and loan products designed for environmentally focused projects, including new green constructions and startup loans.

In this article:

• The key differences between green bonds and loans
• Green financing options for entrepreneurs
• How to get sustainable financing

What are green bonds and loans?

Green bonds and loans are just like conventional bonds and loans, except that they’re provided for green projects. They allow investors and business owners to align their business missions with their values and help give back to the planet.

Green bonds are a type of fixed-income investment issued by public, private, or multilateral entities to raise capital for green initiatives. They allow investors to fund projects with a positive environmental impact and, like traditional bonds, promise a stated return on investment. They must finance or refinance sustainable projects. Some projects funded by green bonds may include renewable energy, energy efficiency, clean transportation, pollution prevention and control, conservation, water and wastewater management, and green buildings that meet global standards.

Green loans are loans for projects that expect to have a positive environmental impact. These aren’t just traditional business loans , however. Both green bonds and loans must meet four Green Loan Principles (GLPs) or Green Bond Principles (GBPs), which are governed by the International Capital Market Association (ICMA). These are: (GLPs) or Green Bond Principles (GBPs), which are governed by the International Capital Market Association (ICMA). These are:

• Use of proceeds: Borrowers must show the project has clear environmental benefits, like climate change mitigation or biodiversity reconstruction.
• Process for project evaluation and selection: Borrowers must communicate the environmental objectives of their green project and identify any potential risks and mitigations for adverse social or environmental impacts.
• Management of proceeds: Borrowers must track the use of proceeds transparently.
• Reporting: Borrowers must annually report on how loan proceeds are used and the actual impact of the project’s goals.

Green bonds and loans may be a good part of a company’s environmental, social, and governance (ESG) strategy.

How green bonds work

Like loans, green bonds are designed to finance projects that have a positive environmental impact. GBPs are not as strict as GLPs because financial institutions aren’t acting as lenders. Instead, investors buy a green bond to support a project they believe in and from which they expect to earn an investment return.

That said, there are still regulations in place. Green bonds are typically verified by a third party, like the Climate Bonds Standard Board, to certify that the bond will fund projects with environmental benefits.

Types of green bonds

Green bonds are all a form of debt financing for businesses, but each bond may look different depending on the issuer. There may be differences based on how bond proceeds are used and the recourse that bondholders have in the case of issuer liquidation.

Some of the most common options in the green bond market include:

• Use of proceeds bond: These bonds have the same credit rating as the issuer’s other bonds, and should the issuer liquidate, bondholders have recourse to the issuer’s other assets.
• Project bonds: These bonds are limited in scope to a specific green project, so investors only have recourse to project-related assets.
• Securitization bonds: These bonds gather several projects into a single debt portfolio, to which investors have recourse to the assets underlying all projects.
• Covered bonds: These bonds finance a group of projects called a “covered pool.” Investors have recourse to the issuer’s assets, but if the issuer cannot repay the debt, investors have recourse to seize the covered pool.

Green bonds and loans function similarly to traditional ones. They’re secured in different ways depending on the issuer and the bond type.

How to issue green bonds

Issuing green bonds is a good way to raise money while aligning your values with your business goals. The International Finance Corporation (IFC) offers a complete Green Bond Handbook that breaks down the step-by-step process of how to issue a green bond. It’s a somewhat substantial process, so we encourage you to read the handbook if you’re serious about issuing green bonds.

In a broad sense, you must identify an eligible green project, develop a Green Bond Framework that is aligned with GBP, and meet GBPs as you execute the process. Some keep steps include:

1. Reviewing your company’s sustainability strategy and identifying a specific project(s) for which you’ll issue a green bond.
2. Creating a detailed Green Bond Framework that outlines why your projects qualify as green and how you will honor GBP criteria.
3. Conduct your due diligence to verify that all projects meet green credentials, including getting certified by a third party like the Climate Bonds Standards Board.
4. Establish a process for managing and transparently reporting fund use and the environmental impact of funded projects.
5. Market the green bond to potential investors and follow standard bond issuance procedures, including communicating the bond structure, coupon rate, and maturity rate.
6. Ensure reporting and regulatory compliance and engage with relevant stakeholders throughout the green bond issuance process and project completion.

The World Bank is one of the world’s largest issuers of green bonds, and many businesses may find it makes sense to work with their established experts. Whether you’re looking to reduce carbon emissions, provide low-carbon energy alternatives, build new green constructions, support sustainable development, or something else these bonds are a great source of green financing .

How green loans work

Green bonds and loans have several key differences. Most importantly, bonds are issued to investors by a business while loans are taken from a lender by a business.

These loans are just like any other small business loan with the exception that they must meet GLPs to ensure a positive environmental impact. If you have sustainable development goals, these loans are a great way to take climate action while growing your business.

SBA loan programs

Some support green bonds and loans for both individuals and businesses. For instance, the U.S. Small Business Administration (SBA)’s Green Lender Initiative has added more climate lenders to the popular SBA loan programs.

While you’ll have to meet GLPs to demonstrate that your project will help fight climate change and has sustainability targets, that’s just the beginning of eligibility requirements. Depending on the type of loan, you’ll also have to meet credit score, time in business, and annual revenue requirements, just as you would for a traditional loan.

Types of green loans

Just about any type of loan product could be green. Some lenders specialize in green financing, and some may offer preferential terms for qualifying loans. Some of the funding options you might pursue include:

• Term loans: Traditional loans in which you receive an upfront lump sum of money and repay through monthly payments based on an interest rate.
• SBA loans: Loans backed by the U.S. Small Business Administration that offer competitive interest rates and loan terms.
• Business lines of credit: A cross between a loan and a business credit card in which you receive access to a maximum line of revolving credit, but you only pay interest on the amount you use. Once you’ve repaid the drawn capital, you have access to the full loan amount again.
• Equipment financing: Sustainable financing for equipment that supports green initiatives.
• Commercial real estate loans: Green building loans to make sustainable investments in real estate or support green constructions.

Final thoughts

Green bonds and loans are excellent resources for business owners who want to make a positive impact on the environment. These financial instruments offer affordable access to capital but are strictly regulated. You’ll need to meet green bond and loan principles to get and keep access to funding. Nonetheless, if you have green goals, green bonds and loans offer you a way to align your personal values with your business growth.

FAQs about green bonds and loans

How do I issue a green bond?

To issue a green bond, you must identify a project that meets Green Bond Principles (GBPs) and set up procedures to ensure proper bond issuance and compliance with GBP regulations. The International Finance Corporation (IFC) offers a Green Bond Handbook that offers a detailed breakdown of how to issue a green bond.

What’s the difference between green bonds and climate bonds?

The two terms are often used interchangeably, but authorities like the Climate Bonds Initiative have a strict delineation between the two terms. Climate bonds are for projects specifically focused on reducing carbon emissions or the effects of climate change, while green bonds are the term used for more broad sustainability-linked bonds.

What’s the difference between green bonds and loans?

Bonds are issued by a company to investors to raise funds for a green project in exchange for a promised percentage of returns. Loans are provided to a company by lenders in exchange for repayment, plus interest, according to a repayment schedule.

How do you qualify for green bonds and loans?

To qualify, you must adhere to green bond principles or green loan principles determined by the International Capital Market Association (ICMA). These include meeting requirements for use of proceeds, process for project evaluation and selection, management of proceeds, and reporting.

What is greenwashing?

Greenwashing is a deceptive practice in which an organization promotes a green project that is not actually green. If a company does not use the proceeds of green bonds and loans for environmentally friendly projects, that is greenwashing.

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