Green bonds: who checks that the money goes where it says?

Published 6 November 2026 · Responsible finance

A green bond pays the same coupon and carries the same credit risk as any other bond from the same issuer. If the company or government defaults, green bondholders rank exactly where its other bondholders rank. What makes the bond "green" is a promise: an amount equal to the money raised will finance projects with environmental benefits. The useful question for an investor is therefore not whether green bonds are good, but who checks the promise, how, and with what consequences if it is broken.

A promise about spending, not about the issuer

The first bonds of this kind came from development banks: the European Investment Bank's "Climate Awareness Bond" in 2007, then the World Bank's first green bond in 2008. Corporate and sovereign issuers followed; France, for example, issued its first green government bond (a "green OAT") in January 2017.

The key point is that the label applies to the use of the money, not to the issuer. An oil company, a utility with coal plants or a government with large fossil-fuel subsidies can issue a green bond, provided the money raised goes to eligible projects. That is not necessarily a scandal: financing a utility's wind farms can matter more than financing a company that was already green. But it means a green bond says nothing, by itself, about the rest of the issuer's business. Investors who care about that need the kind of analysis we describe in our checklist for reading a responsible-investment policy.

A second limit follows from the fact that money is fungible. Most issuers do not open a separate bank account for green bond proceeds. They track them: an amount equal to the proceeds is matched against a portfolio of eligible projects. If the issuer would have built those projects anyway, with or without the bond, the bond's own contribution is hard to establish, the same "company impact versus investor contribution" problem we discussed in what impact investing measures.

The voluntary rulebook: ICMA's Green Bond Principles

Most green bonds in the world are issued under the Green Bond Principles published by the International Capital Market Association (ICMA), first in 2014 and revised since. They are voluntary guidelines, not law, and are built around four core components:

1. Use of proceeds: the eligible project categories (renewable energy, energy efficiency, clean transport, green buildings and so on), described in the documentation.
2. Project evaluation and selection: how the issuer decides which projects qualify, and who in the organisation decides.
3. Management of proceeds: how the money is tracked, and where unallocated proceeds are held in the meantime.
4. Reporting: regular information on where the money went and, where possible, the expected environmental effects.

The Principles also recommend that issuers publish a green bond framework explaining all of this, and that they appoint an external reviewer. Recommend is the operative word: nothing obliges an issuer to do either, and the Principles leave the definition of "green" largely to the issuer.

Who checks: the four kinds of external review

ICMA's guidelines for external reviews distinguish several services, which are often confused in marketing material:

• Second-party opinion. An independent firm with environmental expertise assesses the issuer's framework before the bond is sold: are the categories credible, is the process sound? This is the most common form. It is an opinion on a plan, given before any money is spent.
• Verification. A check against a set of criteria, which can take place before issuance or later, on the actual allocation of the funds. Auditors often provide this kind of limited or reasonable assurance on allocation reports.
• Certification. The bond is certified against an external standard, such as the Climate Bonds Standard, whose sector criteria define what counts for each type of asset.
• Scoring or rating. A specialised provider grades the bond or its framework on its own methodology.

Two features matter. First, the reviewer is chosen and paid by the issuer, as with credit ratings. Second, a review before issuance is far more common than a check afterwards. An investor reading "this bond has a second-party opinion" has learnt that the plan was reviewed, not that the money was spent as planned.

After the sale: allocation and impact reports

Most issuers publish two kinds of report. An allocation report says how much of the proceeds has been assigned to which project categories, how much remains unallocated, and what share refinanced existing projects rather than new ones. An impact report estimates the environmental effect, such as megawatt-hours of renewable electricity produced or tonnes of CO2 avoided.

The allocation report is the more reliable of the two, because it is an accounting exercise and can be audited. Impact reports depend on assumptions: the baseline against which emissions are "avoided", the share of a project attributed to the bond, the period covered. Methods differ between issuers, so figures from two green bonds are rarely comparable. Some sovereign issuers have gone further: France set up an independent council that commissions evaluations of the environmental effects of the spending financed by its green OATs.

The EU Green Bond Standard: from voluntary to supervised

The European Union has created a stricter, still optional, label. Regulation (EU) 2023/2631 on European Green Bonds has applied since 21 December 2024. An issuer that wants to use the "European Green Bond" or "EuGB" name must meet requirements that go well beyond market practice:

• The EU Taxonomy defines "green". The proceeds must go to economic activities aligned with the EU Taxonomy, with a flexibility pocket of up to 15% reserved for a few limited cases, mainly activities for which technical screening criteria have not yet been adopted.
• Mandatory external review, before issuance (on the factsheet) and after (on the allocation report once the proceeds are fully allocated).
• Supervised reviewers. External reviewers of European Green Bonds must be registered with, and are supervised by, the European Securities and Markets Authority (ESMA), with rules on conflicts of interest and qualifications.
• Standard reports. Allocation reports every year until the proceeds are fully allocated, and at least one impact report over the life of the bond, on templates set by the regulation.

The standard is a label, not an obligation: green bonds that do not use it can still be issued under the ICMA principles. The regulation does, however, offer voluntary disclosure templates for those other bonds marketed as environmentally sustainable. For fund investors, the EuGB label interacts with the rules on fund names, since funds using sustainability-related terms must meet minimum thresholds; our article on what the naming rules require covers that side.

Questions to ask about a green bond

1. Which standard? ICMA principles only, a certification such as the Climate Bonds Standard, or the EU Green Bond Standard?
2. Which review, when? Is there only a pre-issuance opinion, or also a post-issuance verification of allocation, and is it public?
3. New money or refinancing? What share of the proceeds refinanced projects that already existed, and how far back does the look-back period go?
4. What is still unallocated, and where is it held meanwhile?
5. Impact method. What baseline is used for avoided emissions, and are the calculations published?
6. The rest of the issuer. Does the issuer's overall strategy contradict the projects the bond finances?

What a green label can and cannot tell you

A well-documented green bond tells an investor that a defined amount of money was matched to defined projects, and that someone independent looked at the process. It does not prove that the projects would not have happened anyway, and it does not make the issuer green. The EU standard narrows the gap between promise and proof by fixing the definition, requiring checks after issuance and supervising the checkers. For bonds outside it, the documentation is there to be read; the answers to the questions above usually are too, in the framework and the reports, for anyone who looks.

This article is general information, not investment advice. Rules are described as published at the date above; check the current texts before relying on them.

Sources

• Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds, EUR-Lex.
• International Capital Market Association, Green Bond Principles, and its Guidelines for Green, Social, Sustainability and Sustainability-Linked Bonds External Reviews.

Related: what impact investing measures · fund-name rules · responsible-investment policy checklist.