Bonds are loans provided by an investor to a borrower that are widely used to fund activities. The borrower agrees to pay back the loan with interest at a specified future date. Bonds can be used to finance a wide range of projects, and the proceeds are not necessarily earmarked for any particular purpose.
Green bonds are types of bonds that are issued specifically to finance green projects, i.e. the proceeds from green bonds are earmarked for green projects. The use of proceeds is typically guided by a set of criteria or green bond frameworks.
Green bond frameworks and standards
Frameworks and standards, such as the recently adopted EUGBS, aim to provide a common language for the use of proceeds. This indicators only includes those green bonds that are either aligned with the four core components of the International Capital Market Association (ICMA) green bond principles or are certified by the Climate Bond Initiative (CBI), i.e. follow the climate bond standard or are CBI aligned (i.e. unlabelled (conventional) bonds issued by a CBI-aligned issuer or self-labelled green bonds that do not need to be aligned with ICMA principles or certified by the CBI).
Types of green bond issuers
Green bonds can be differentiated by the entity that issues them. For instance, corporate green bonds are issued by a corporate entity, such as a company or financial corporation. Sovereign green bonds are issued by a national government. Supranational green bonds are issued by an international body such as the EU, which started to issue green bonds in 2021 under the NextGenerationEU programme , or by international financial institutions (IFIs) such as the European Investment Bank, the lending arm of the EU. Data providers also differentiate green bonds issued by subnational entities such as municipalities or agencies from other types of green bond. Green bonds issued by agencies are usually securitised by a government-sponsored enterprise or a government department.
The NextGenerationEU instrument was established to support the EU’s recovery from the economic impacts of the COVID-19 pandemic. In the coming years, the European Commission intends to fund up to EUR 250 billion (or 30%) of its NextGenerationEU plan by issuing green bonds .
EU taxonomy for sustainable activities
The EU taxonomy for sustainable activities is a classification system that defines sustainable activities, e.g. activities for climate change mitigation and adaptation .
This indicator is calculated based on data on the issuance of green bonds by companies, banks, governments, supranational bodies, and subnational bodies (municipalities and agencies) in the EU. It shows green bond issuance as a percentage of all bonds issued and by type of green bond issuer. Data on corporate and sovereign bonds were downloaded on 3 March 2023 by the European Securities and Markets Authority (ESMA), and data on bonds issued by supranational bodies, municipalities and agencies were downloaded by the EEA on 28 March 2023. Please note that the data for bonds issued by supranational bodies, municipalities and agencies tend to be less reliable than the data on bonds issued by corporate entities and sovereign governments. Moreover, as the groups of issuers were compiled by ESMA and Refinitive Eikon, minor double-counting at margins cannot be excluded, despite the utmost care.
Green bond indicators such as this may contain discrepancies, as they rely on data provided by various commercial data providers, which report on issuances at different dates and rely on different green bond standards or frameworks or make errors. Moreover, numbers from the same provider can vary depending on the date of data download and the currency exchange rate used.
It is important to note that the indicator does not provide information on the environmental impact or the sustainability of the projects financed by green bonds. In addition, the indicator does not capture the varying ‘greenness’ levels of the projects financed by different bonds or the contribution of financed projects to achieving the Paris Agreement goals, which are increasingly important factors for investors and regulators. Finally, fixed-income instruments cover only parts of the financial system and this green bond indicator therefore only partially reflects trends in financing green assets. Those trends might be different for different environmental objectives depending on the financial preferences and the ‘investability’ of the projects and activities funded.
This indicator is a headline indicator for monitoring progress towards meeting targets of the Eighth Environment Action Programme (8th EAP). It contributes mainly to monitoring in relation to aspects of 8th EAP Article 3(u), which requires ‘mobilising resources and ensuring sufficient sustainable investments from public and private sources… consistent with the Union’s sustainable finance policy agenda’ . The European Commission communication on the 8th EAP monitoring framework specifies that this indicator should be used to monitor the ‘increase [in] the issuance of green bonds to boost public and private financing for green investments’ .