Green Financial Instruments for a More Sustainable Future
The commitment to the future and the need to promote a more sustainable planet reinforce the necessity of creating mechanisms to finance the transition to a low-carbon economy. Frameworks are fundamental documents in the process of issuing green bonds. CVR helps to construct this document aligned with the Principles published by the International Capital Market Association (ICMA).
Green financial instruments play a fundamental role in mitigating negative impacts on the environment. These instruments allow companies to invest in projects related to, for example, energy efficiency, renewable energy, sustainable transportation, waste management, nature conservation, or projects with social impact. Green instruments include:
- Green Bonds
- Social Bonds
- Sustainability Bonds
- Sustainability-linked Bonds
Funds obtained through the issuance of Green Bonds must be used exclusively to finance or refinance projects that have a clear environmental benefit, designated as eligible green projects.
Social Bonds, on the other hand, are intended for financing projects with a positive social impact, promoting, for example, food security, access to essential services and infrastructure, and the development of employment generation programs.
When these eligible projects simultaneously fall under green and social project categories, the bonds issued are designated as Sustainability Bonds.
Sustainability-linked Bonds are bonds with a variable rate dependent on the achievement of certain sustainability goals. In this sense, companies commit to meeting these goals within a predefined time period.
Framework Construction
Some organizations have issued a set of guidelines with various orientations aimed at facilitating the issuance of these types of financial instruments. The Green Bond Principles, Social Bond Principles, and Sustainability Bond Principles, developed by the International Capital Markets Association (ICMA), are organized into 4 pillars:
- Use of Proceeds
- Project Evaluation and Selection
- Management of Proceeds
- Reporting
Constructing a framework aligned with the principles of the bonds to be issued is a fundamental step in this process. This document contains relevant information for investors, such as the categories in which eligible projects fall, how the selection of these projects will be executed, fund management, and how the allocation of these funds and the impact of eligible projects will be reported. Thus, before issuing bonds, the alignment of the framework with the respective Principles will be evaluated by an entity acting as an External Reviewer, demonstrating the importance of drafting this document.
Regarding Sustainability-linked bonds, the Principles, also developed by ICMA, are organized slightly differently, consisting of the following 5 pillars:
- Selection of Key Performance Indicators (KPIs)
- Calibration of Sustainability Performance Targets (SPTs)
- Bond Characteristics
- Reporting
- Verification
Constructing a framework for this type of bonds is also crucial, containing detailed information about the selected KPIs and SPTs and the timeframe in which companies commit to meeting the defined targets. The KPIs must be relevant and fundamental to the company's sustainability strategy and address environmental, social, and/or governance challenges in the sector in which they operate. Additionally, the KPIs must be quantifiable and externally verifiable. For each KPI, one or more SPT(s) will be selected to express the level of ambition to which the issuer is willing to commit. Thus, SPTs must be ambitious but realistic, aligned with the business and sustainability strategy of the company, and with a defined timeline for achievement. These goals may include reducing greenhouse gas emissions or electricity consumption from renewable energy sources.
CVR provides support in framework construction, working to align the document with the Principles of Green Bonds, Social Bonds, Sustainability Bonds, or Sustainability-linked Bonds, depending on the type of bonds to be issued. For the preparation of these documents, various information will be requested from companies, such as their sustainability strategy, alignment with the Sustainable Development Goals, projects to be developed within the company, among others. The relevant information required will always depend on the type of bonds and the projects that will be developed with the funds obtained.