A green bond is a bond whose proceeds are earmarked for projects with clear environmental benefits, such as renewable energy, energy efficiency, clean transport, green buildings, pollution control or climate adaptation. In most respects it is an ordinary fixed income security: it pays a coupon, has a fixed maturity and ranks like the issuer's other debt. What makes it green is a promise about how the money will be used and a commitment to report on it.
Green bonds are the largest group of "labelled" or use-of-proceeds bonds, alongside social bonds and sustainability bonds. They differ from sustainability-linked bonds, where the money can be used for anything but the terms change if the issuer misses targets. Most issuers follow the voluntary Green Bond Principles published by the International Capital Market Association (ICMA); in the EU a stricter, optional European Green Bond Standard is also available. The Islamic finance equivalent is the green sukuk.
Green bonds in plain terms
Imagine lending money to a neighbour who says it is for a new roof. A normal loan comes with no strings: once the money is handed over, it could go on a holiday. A green-bond-style loan is a loan where the neighbour promises in writing to spend it on solar panels for the roof, keeps the receipts, and shows you each year how much electricity the panels saved.
The neighbour pays you back the same way either way, so your risk is the same as on any loan to that person. What you gain is knowing where your money went. That is the core of a green bond: same borrower, same repayment, but a public promise about the use of the cash and a habit of reporting on it.
History
The European Investment Bank issued the first such bond in July 2007, a €600 million Climate Awareness Bond whose proceeds went to renewable energy and energy-efficiency projects. In November 2008 the World Bank issued its first green bond, a Swedish krona deal of about SEK 2.3 billion arranged by the Swedish bank SEB with Scandinavian pension investors. Development banks dominated the early market. Corporate bond and bank issuance took off after ICMA published the Green Bond Principles in 2014, and the first sovereign green bonds followed later in the decade, with Poland issuing in December 2016 and France launching a large green government bond in January 2017. Many governments now run regular green bond programmes.
How green bonds work
An issuer first writes a green bond framework that sets out which project categories qualify, how projects are chosen, how proceeds are tracked and what it will report. Most issuers obtain an external review, usually a second-party opinion, from a specialist firm. The bond is then sold through normal underwriting channels with the framework referred to in the prospectus. After issuance the issuer publishes allocation reports (where the money went) and impact reports (estimated results, such as tonnes of CO2 avoided). Some bonds also seek certification against the Climate Bonds Standard run by the Climate Bonds Initiative.
Because repayment does not depend on the projects, a green bond normally has the same credit rating, often in the investment-grade range, and credit risk as the issuer's conventional debt. Buyers include pension funds, insurers, central banks and dedicated green bond funds, many of them practising sustainable investing or impact investing.
Pricing and the "greenium"
Green bonds sometimes price at a slightly lower yield than comparable conventional bonds from the same issuer, a gap known as the "greenium". Studies find it is usually small, often a few basis points, and it varies by market and over time; in many deals it is absent. Issuers often cite other benefits instead: a broader investor base, bigger order books and a public signal of their climate strategy. Some sovereigns, such as Germany since 2020, issue green "twin" bonds with the same coupon and maturity as an existing conventional bond, which lets investors see the yield difference directly.
Standards and regulation
Green bonds are not a separate legal product in most countries; they are governed by ordinary securities law plus voluntary market standards. The EU's Regulation (EU) 2023/2631 created the European Green Bond Standard, which issuers have been able to use since 21 December 2024. A bond carrying the "European Green Bond" or "EuGB" name must allocate at least 85% of proceeds to activities aligned with the EU Taxonomy and use an external reviewer registered with ESMA; the standard is voluntary, so other green bonds remain legal outside it. Other markets, including China, Japan and the ASEAN region, publish their own green bond guidelines, many based on ICMA's.
Greenwashing risk and criticism
In the capital market the main criticism is greenwashing: labelling bonds green without real environmental benefit. Concerns include loose project definitions, refinancing of old assets that would have existed anyway, gas or efficiency projects at heavy-emitting firms, and weak impact reporting. Because proceeds are fungible, an issuer can finance green projects with the bond while expanding high-carbon activities with other money. Supporters argue that the label still improves transparency and that tighter standards, external review and regulation such as the EU standard are steadily raising the bar. Investors can judge a deal by reading the framework, the second-party opinion and later reports, and by asking whether the issuer's wider strategy fits the goals of the Paris Agreement.