A green bond is an ordinary bond whose proceeds, or an equivalent amount, are used only to finance or refinance eligible environmental projects. The market standard is the ICMA Green Bond Principles, last updated in June 2025. They are voluntary guidelines built on four core components: use of proceeds, project evaluation and selection, management of proceeds, and reporting. In the UK, the best-known issuer is the government. HM Treasury reported in November 2025 that more than £51 billion had been raised under its Green Financing Programme since September 2021, through green gilts and NS&I Green Savings Bonds.
What makes a bond "green"
Legally, a green bond is debt like any other. The issuer borrows, pays interest and repays at maturity on the terms set out in the bond documents. The green label comes from a commitment about how the money will be used and how that use will be reported. The Green Bond Principles define green bonds as bonds where the proceeds "will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects" and which align with the four core components.
The Principles recognise broad eligibility categories, including climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention and control. Bonds that intentionally mix green and social projects are called sustainability bonds and follow separate guidelines.
The four core components
- Use of proceeds. The eligible projects should be described in the bond's legal documentation and give clear environmental benefits. Where proceeds refinance existing projects, issuers are encouraged to say how much is refinancing and how far back they look;
- Process for project evaluation and selection. The issuer explains its environmental objectives, how it decides which projects qualify, and how it manages environmental and social risks;
- Management of proceeds. The net proceeds, or an equal amount, are credited to a sub-account or otherwise tracked, and the balance is adjusted as money is allocated. Issuers should say how unallocated cash is held in the meantime;
- Reporting. The issuer reports at least annually until the proceeds are fully allocated. The report should list the projects, the amounts allocated and the expected impact.
The Principles also recommend a Green Bond Framework setting out how the issuer meets these components. They recommend a pre-issuance external review, often called a second party opinion, and post-issuance verification of the allocation of proceeds by an external auditor or other third party.
UK green gilts and Green Savings Bonds
The UK's first green gilt was sold in September 2021 and raised £10 billion. It was a 12-year bond maturing on 31 July 2033. A second sale the following month took the total to £16 billion. Green gilts are issued by the UK Debt Management Office. NS&I sells retail Green Savings Bonds to savers. HMRC's list of gilts exempt from capital gains tax currently includes three green gilts: the 0⅞% Green Gilt 2033, the 4⅝% Green Gilt 2037 and the 1½% Green Gilt 2053.
The programme is governed by the UK Government Green Financing Framework, updated in November 2025. It has seven categories of eligible expenditure: clean transportation, renewable energy, energy efficiency, pollution prevention and control, living and natural resources, climate change adaptation, and nuclear energy. HM Treasury publishes annual reports on how the money is allocated and on its environmental impact and social co-benefits. The framework aligns with the ICMA Principles, and S&P Global Ratings rated it "dark green", its highest rating.
Investing in green bonds: tax and practical points
- Green gilts. They are gilts, so gains on disposal are exempt from capital gains tax under section 115 TCGA 1992, as for conventional gilts. The green label does not change the tax treatment;
- NS&I Green Savings Bonds. They are fixed-rate and fixed-term. You can invest from £100 up to £100,000 per person in each issue. You cannot withdraw money before maturity, and NS&I says the interest is taxable in the tax year the bond matures. Check the current issue's rate and term before investing;
- Corporate green bonds. Read the issuer's framework, the second party opinion and the latest allocation report. The credit risk is the issuer's, not the projects'. A green bond from a weak issuer is still a weak credit.
Issuing a green bond: what a company takes on
For a company, a green bond is a financing decision with a reporting commitment attached. The cost is mainly in the extra work:
- A framework. It sets out the eligible project categories, the selection process and the governance of the bond;
- Systems to track proceeds. Spending on eligible projects must be traced to the bond, often project by project, through the life of the bond;
- Annual allocation and impact reports. Impact figures, such as tonnes of carbon avoided, need a method that will stand up to review;
- External review. A second party opinion before issue, and third-party verification of allocation after it.
The accounting is the same as for any other debt. Under FRS 102, a basic debt instrument is measured at amortised cost using the effective interest method. Transaction costs, including the framework and second party opinion where they are directly attributable to the issue, need to be considered when setting the effective interest rate. The green label does not create a separate asset or liability.
Greenwashing risk
The Green Bond Principles are voluntary. Regulation still applies to what firms say about green products. Under the FCA's anti-greenwashing rule (ESG 4.3.1R), an authorised firm communicating with UK clients about a product or service must ensure that any reference to its sustainability characteristics is consistent with those characteristics and is "fair, clear and not misleading". For issuers, the practical protection is to promise only what the tracking systems can show. Allocation reports and impact claims should be supported by evidence that an auditor or reviewer can test.
Sources: ICMA's Green Bond Principles (June 2025), UK Government Green Financing Programme, the Green Financing Framework 2025, the first green gilt, HMRC's exempt gilts list, NS&I Green Savings Bonds, the FCA's ESG 4.3 and the FRC's FRS 102. See also our guides to ESG reporting and what ESG means.
Acumon provides independent assurance over sustainability information, including allocation and impact reporting, through our ESG assurance service. Our financial reporting team can advise on accounting for the debt itself.