Green bonds and labelled debt

A green bond is an ordinary bond — a loan to a company or government that pays interest — with one extra promise: the proceeds are earmarked for environmentally beneficial projects, such as renewable energy, clean transport, or water treatment.

How they work

Mechanically a green bond behaves like any other bond: a face value, a coupon, a maturity, and credit risk tied to the issuer. The difference is the use of proceeds and the reporting obligation that comes with it. Issuers typically align with voluntary standards like the Green Bond Principles and may obtain an independent "second-party opinion" to verify the green claim.

The wider family of labelled debt

Green bonds are the best-known of a growing family:

• Social bonds — fund social projects (affordable housing, healthcare, education).
• Sustainability bonds — a mix of green and social.
• Sustainability-linked bonds (SLBs) — different in design: proceeds can be used for anything, but the coupon rises if the issuer misses sustainability targets (for example, an emissions-reduction goal). The incentive is built into the interest rate.

The catch

The "green" label is largely self-declared and voluntary, so green bonds are a prime target for greenwashing. Verify the standard followed, whether there is independent review, and whether the issuer actually reports on where the money went. A label is a starting point for due diligence, not a guarantee.