As of 2023, with the adoption of the CSRD, a document that makes it mandatory to undertake and report on ESG activities undertaken by a company, all countries are required to introduce legislation mandating ESG reporting as part of financial reporting. From now on, companies are beginning to conduct a variety of activities that incorporate elements of environmental protection, social responsibility and transparent management. Such activities include the issuance of green bonds.
Green investments – what are they?
A green investment can be defined using the zero-carbon criteria developed by, among others, the European Investment Bank, focusing mainly on climate transformation, including energy efficiency; and the evaluation criteria developed by the MDB-IFDC (Multilateral Development Banks – International Development Finance Club) and the People’s Bank of China, focusing on projects aimed at environmental protection sensu largo. The most commonly used instrument for financing such investments is primarily the so-called green bonds.
Green bonds are one of the main financing tools for sustainable environmental investments, often serving local communities. The procedure for issuing green bonds is subject to a special legal regime under the Bond Law, and requires obtaining a rating, intermediation by a market maker and representation by a bank or other national credit institution. Potential bondholders should be duly informed about the risks of sustainable investments.
Green bonds (transformational bonds) are designed to finance investment for the sustainable development of a company. They were introduced by Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on establishing a framework to facilitate sustainable investments. Banks were required to report non-financial data and develop a plan to counteract and analyze risk exposures arising from ES
Green bonds one of the tools for financing ESG investments
Green bonds can be considered one of the financing tools for ESG investments due to their function of creating debt at the issuer to satisfy the financing of an investment that pursues sustainable development goals, such as the construction of RES-based power plants or investments in zero-carbon technology, often serving socially excluded local communities. In practice, the most common bonds issued are those aimed at financing investments aimed at protecting the environment or preventing climate change. In many legal regimes, it is possible to issue green bonds by companies (corporate bonds), local government units (municipal bonds) and state financial institutions (government bonds). These institutions, when issuing bonds, indicate their purpose with details of environmental investment projects and the proposed interest rate. Rating agencies are involved in the investment process, assessing the rating value of the bonds based on the creditworthiness of the issuer and how the proceeds are used, often assisting in the development of good issuance practices for issuers. High premium yields and low interest rates, compared to conventional bonds, are indicated, which primarily encourages issuance inemerging markets. Assessing the credibility of an issue should be made possible first and foremost for investors, who will be able to familiarize themselves with the risks of the issue, especially the
Legal aspects of bonds
In Poland, the issuance of transformational bonds is carried out under the regime formed by Article 27p of the Bond Law of January 15, 2015. Funds raised through the issuance of bonds should be used to finance an environmentally sustainable investment within the meaning of Regulation 2020/852, and this purpose and a description of the planned investment must be indicated in the terms of the bond issue. The maturity of the bonds must not be shorter than 5 years, which determines the period of financing the sustainable investment and returning the funds raised to bondholders. Before issuing the bonds, the issuer should apply for a rating from a rating agency, as their low profitability may indicate the threat of insolvency of the issuer, as well as negatively translate into its creditworthiness – it means that the issuer is not able to repay the debts under the bonds. Currently, transformational bond ratings are valued according to a number of economic factors, including the GAR of the company issuing them. The valuation of a green bond rating primarily takes into account the environmental risk of the activities undertaken by the issuer and often, the amount of capital put into the green investment. The second rating model is subject to criticism because of its ability to reduce the capital requirement for contributing to sustainable finance.
The representative bank should exercise due diligence as the legal representative of bondholders in proceedings involving the issuer, it can take steps to signal violations of the terms of issue and creditor protection by notifying them on its website. Such a solution will allow a very large number of bondholders to be notified and become aware of the violation, and consequently decide on early redemption. In the event of repeated violations on the part of the issuer, the representative bank may take steps to satisfy itself from the collateral, consisting, among other things, of bringing an action for payment of the amount accruing from the receivables due to the bondholders or the remuneration owed to itself, but these receivables do not have priority over the receivables of the bondholders.
Green bonds are a frequently used tool for financing sustainable investments by commercial companies because of their ability to attract a wide range of investors. They are subject to a specific issuance regime of offering only through a public offering on a regulated market, ATS or DLT-based ATS with all the rigors typical of a public offering regime. A very high level of dedication of the issue proceeds to green investment is essential to prevent their possible embezzlement. When issuing them, it is necessary to establish an entity representing the collective interests of bondholders to ensure the sustainable representation of investors’ collective interests in the issuance process and in the subsequent process.
This article was produced in cooperation with the Student Academic Circle of Debate and Public Speaking
Cover photography: Pexeles
Bibliography:
[1] Directive 2022/2464 of the European Parliament and of the Council of December 14, 2022 amending Regulation (EU) No. 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU with regard to corporate sustainability reporting (Official Journal of the EU L 322/15, 16.12.2022).
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[3] The Green Asset Ratio (GAR): a new key performance indicator for credit institutions, V. Bruhl, Eurasian Economic Review, Volume 13 (2023), pp. 57-83
[4] Insurance methods of financing the realization of environmental risks of enterprises in Poland. A. Hęćka-Sadowska, UEP Publishing House. University of Economics in Poznań, Poznań 2023, p. 104.
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[6] ICMA, Green Bond Principles.Voluntary Process Guidelines for Issuing Green Bonds, Paris 2022, pp.5-7. https://www.icmagroup.org/assets/documents/Sustainable-finance/2022-updates/Green-Bond-Principles-June-2022-060623.pdf
[7] Law of January 15, 2015 on bonds (i.e., Journal of Laws 2022, item 2244).
[8] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on establishing a framework to facilitate sustainable investment, amending Regulation (EU) 2019/2088 (Official Journal of the EU L 198, 22.06.2020, p. 13).
[9] The Role of Credit Rating Agencies in Responsible Finance. D. Cash. Germany: Springer International Publishing 2018, pp.107-109
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