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January 16, 2025 | John Elliott, Vice President & Chief Compliance Officer
What Are Green Bonds? Understanding ESG-Labeled Bonds
Green labeled bonds belong to a family of designations affixed to bonds issued under the “ESG” labels (“Environmental”, “Social”, and “Governance” bonds). There exist readily available standards to which borrowers can use for labelling their green bonds, such as the International Capital Market Association’s (ICMA) standards and the Climate Bond Initiative’s (CBI) standards. Third-party verifiers – often charging a fee – can assist throughout the entire process of evaluating a project through the lens of any of these standards, from the initial evaluation through execution, as well as beyond with post-issuance reporting. Some borrowers, however, “self-designate” their bonds and use the green label without a third-party verifier.
Post-Issuance Obligations for Green Bonds
Once the bonds have been issued, depending on the selected standards, there may be ongoing post-issuance obligations. These are primarily continuing disclosure obligations about the project, which investors desire in order to monitor the borrower’s continued adherence to the standards declared in the official statement of the bonds. As stated above, third-party verifiers can often assist with the task of reporting. All of this goes to convincing investors they aren’t being “greenwashed” – that the green label has some connection to the stated environmentally friendly goals.
The Economic Value of Green Bonds
Borrowers can pursue these labels either for institutional or ideological reasons, but theoretically, ESG-labeled bonds should attract more investors, thereby generating lower yields at issuance. This does not necessarily mean that green bonds always generate the coveted “greenium” (a portmanteau: “green” + “premium”) for borrowers, an effect that is already difficult to ascertain unless a similarly situated issuance comes to market at roughly the same time. There still is insufficient evidence that the greenium is a reliable outcome for borrowers, especially in some sectors, like the tax-exempt higher education sector. In short, borrowers cannot be certain the cost and hassle – both during the transaction execution and post-issuance – will result in a reduced cost of capital for the transaction.
Meet the Author:
John Elliott | jelliot@blueroseadvisors.com | 312-332-1336
Mr. Elliott serves as Vice President and Chief Compliance Officer at Blue Rose. He provides analytical and research support and project management for Blue Rose’s P3, strategic consulting, and debt advisory practice. Mr. Elliott joined Blue Rose’s California office in 2021.
Prior to Blue Rose, Mr. Elliott worked as a research associate for a non-profit think tank in Washington, DC and as a compliance consultant for federal contractors.
About Blue Rose Capital Advisors:
Blue Rose Capital Advisors is an independent financial advisory firm that serves the higher education, healthcare, non-profit, government, and corporate sectors. Blue Rose provides debt, derivatives, reinvestment, strategic and financial consulting services, and other specialized services to help clients achieve their goals. Blue Rose is registered as a Municipal Advisor with the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB).
Blue Rose brings expert guidance and transparency to the often complex and opaque sectors of the capital markets. We embrace a client-first approach and work tirelessly to strengthen their debt transactions, governance, and balance sheets. With our wealth of real-time data, sophisticated modeling capability, and deep industry relationships, we can deliver solutions to almost any financing challenge.
Contact Blue Rose today:
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