Time to go green? Process vs outcome – and what bonds are best for you

Embrace green finance to hit your transition targets

Without wishing to appear too optimistic (or cynical), we believe the funding gap between the resources needed and the funds committed to the green transition so far represent the opportunity of a lifetime. Faced with the double objective of pursuing green transformation and raising capital to fund it, there is a highly attractive window of opportunity for diverse companies to enter the green finance market.

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Both green bonds and sustainability-linked instruments play crucial roles in mobilizing capital for the green transition, but they cater to different issuer needs. Green bonds offer a more prescriptive and process-oriented approach to financing green projects, ensuring that funds are used exclusively for environmental purposes and projects. Sustainability-linked notes, on the other hand, are more flexible and outcome-focused, incentivizing issuers to meet sustainability goals without needing to commit to how they allocate the capital.

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Making the right choice between these instruments depends on the issuer’s business model, sustainability strategy, and investor expectations. Both, however, represent vital tools in the fight against climate change and the push toward a sustainable future.

The green bond CFO/CSO checklist

Step 1: Strategic alignment & regulatory frameworks

• Do we have a clear sustainability strategy?
• Are we familiar with relevant green bond standards?

In deciding whether to issue green bonds, CFOs and CSOs must first ask: Do we have a clear sustainability strategy in place? A green bond issuance is not just a financial exercise but a demonstration of the company’s long-term environmental and sustainability goals. It’s crucial that the company’s mission includes measurable and impactful sustainability initiatives. Then ask: Are we familiar with relevant green bond standards? Familiarize yourself with these standards to ensure any bond issuance will meet market expectations and regulatory requirements. A deep understanding of these frameworks will ensure that the bond is credible and will appeal to ESG-conscious investors, while also mitigating the risk of greenwashing claims.

Step 2: Project availability and funding needs

• Are there projects that meet the green bond criteria?
• Do we need external funds?

Once strategic alignment is confirmed, assess the availability of qualifying projects and the company’s funding needs. Are there projects that meet the green bond criteria? Without a clear set of green projects, the issuance of a green bond cannot happen. Second, evaluate your company’s funding needs for its sustainability projects: Do we need external funds? If external financing is required, a green bond could be an effective mechanism to raise capital while aligning with your sustainability goals.

Step 3: Evaluate financial and operational capacity

• Financial slack: Do we have the financial slack to issue additional bonds? Is the company financially stable enough to support green bond issuance?
• Internal readiness: Do we have the capacity to handle reporting, compliance, and communication? Or should we build it?

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Issuing a green bond requires both financial stability and operational readiness. CFOs should assess whether the company has enough financial slack to support the new bond issuance: Is the company financially stable enough to issue green bonds without jeopardizing its balance sheet? Ensuring financial health is critical, as weak financials could undermine investor confidence. Equally important is operational readiness: Do we have the internal capacity to handle the ongoing reporting, compliance, and communications required by a green bond? Green bonds come with added obligations, including tracking the use of proceeds and producing regular impact reports. If these systems are not already in place, the company must decide whether to build them internally or outsource to third-party experts. Operational readiness will ensure the company can meet investor and regulatory expectations not only before the issuance, but also after.

Step 4: Making the business case

• Costs: Can the company absorb the costs of issuing and maintaining green bonds?
• Direct and indirect benefits: What are the potential financial benefits?

Additionally,

• Will this issuance enable different and additional bond issuances?
• What are the potential risks?

The final step is to build a compelling business case for green bond issuance, weighing both the costs and the potential benefits. CFOs and CSOs need to assess whether the company can absorb the costs associated with issuing green bonds, including certification, legal fees, reporting, and third-party verification. These costs can be substantial, especially for first-time issuers. However, the potential benefits can outweigh these costs. Issuing green bonds can provide access to a new base of ESG-focused investors, improve the company’s ESG reputation, and potentially lead to better financing terms. Additionally, consider whether the issuance will open doors to further green bond offerings and support long-term financing strategies. Lastly, assess the risks, such as reputational damage from greenwashing accusations, regulatory changes, or market volatility. A thorough risk assessment will help ensure that the green bond issuance is sustainable both financially and reputationally in the long term.

This four-step process provides a structured approach for CFOs and CSOs to evaluate whether issuing green bonds is a viable and strategic option for their company. If your company meets these criteria and can manage the costs and compliance, green bonds can provide access to a growing pool of ESG-focused capital while strengthening your sustainability credentials.