Rivian (RIVN) stock hit an all-time low on Tuesday after the company announced it would be selling $1.3 billion in convertible green bond offerings due in 2029.

The electric vehicle maker is just the latest company selling sustainability-linked debt offerings. Other corporations have issued green bonds of their own, including Apple (AAPL), Walmart (WMT), Comcast (CMCSA), and Micron (MU).

So what is a green bond, anyway?

A green bond is a fixed-income asset intended to raise money for projects related to climate change and the environment. Investor returns from green bonds are backed by the credit of the issuer, but the proceeds are set aside for specific, eligible green projects.

In Rivian’s case, the stock plunge likely stemmed from investors wary of the convertible green bonds, as they can be traded in for stock at some point in the future. That would add to the total outstanding shares, thereby diluting the stock.

Rivian stated its green bonds will be used to fund a range of projects involving clean transportation, renewable energy, recycling materials, and pollution prevention, though green notes can also finance other efforts related to clean water, preserving ecosystems, and sustainable agriculture.

Sometimes called sustainable bonds or climate bonds, these financial instruments can be issued by corporations, banks, governments, and nonprofit organizations. Some U.S. lawmakers have even proposed green bonds modeled on WWII-era war bonds to fund the fight against climate change.

The first green bonds were issued in 2007 by the European Investment Bank and the World Bank, and since then, the sustainable debt market has taken off.

In 2021, the global market for green bonds swelled to a record $596 billion, more than doubling the market's value in 2019. Last year, the green bond supply declined to $443 billion, but it is expected to rebound in 2023, according to S&P Global. To date, more than $2 trillion in green bonds have cumulatively been issued, per the Climate Bonds Initiative.

Like their traditional counterparts, green bonds can offer investors regular or fixed-income payments while supporting projects that benefit the environment. However, many have pointed out that this instrument, like many other areas of sustainable finance, has a glaring problem with greenwashing, the practice of exaggerating environmental credentials.

A recent study of almost 1,000 green bond offerings found that many fell short of their promises. In 2022, just 28% of green bonds included language that held issuers accountable to their commitments, as Axios reported.

"The returns on ESG bonds seem to be about the same as those on regular bonds," the authors wrote. "For investors who care about supporting sustainable investments, this may be wonderful news. They can invest virtuously without suffering a financial cost. But perhaps it is too good to be true. Perhaps green bonds pay essentially the same as regular bonds because their underlying promises are, essentially, the same."

Investors should know that the industry is largely self-regulated, meaning issuers disclose information about green bonds on a voluntary basis. However, there are resources to help investors separate high-quality bonds from low-quality ones.

The Green Bond Principles laid out by the International Capital Market Association serve as guidelines to help investors assess the credentials of various offerings. This framework recommends that issuers clearly communicate four key disclosures: the use of the proceeds, the process for selecting green projects, how the proceeds will be tracked, and the expected impact of the projects.

The European Union has also agreed on a set of stricter rules on transparency and green bond labels, though those guidelines are also voluntary.

In the U.S., Treasury Secretary Janet Yellen has previously pointed to green bonds as a key tool in financing the green transition to slash carbon emissions and the need for transparency in the market.

"In theory, it should not be very challenging to mobilize capital," Yellen said at the Institute of International Finance in 2021. "Investor demand for climate-aligned investments, including green bonds and sustainable assets, is rapidly increasing. A key challenge though, as you know, is that the current financial reporting system is not producing the reliable, consistent, and comparable disclosures needed for investors to accurately compare climate-related risks and opportunities across companies."

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