Green bonds have surged in use over the past two years, but the future growth and effectiveness of the market is threatened by difficulties confirming the credit quality of an issuer and ensuring proceeds are used to fund green projects.

As part of our Carbon Market Series, we take a closer look at the innovative tech-based solution to the problem launched by the Bank for International Settlements’ Innovation Hub (BISIH) in Hong Kong in late 2022.

Bringing together carbon markets and capital markets, the technology attaches carbon credit-related digital tokens to green bonds. This reduces the risks of ‘greenwashing’ by issuers of existing green bonds and simplifies distribution. BISIH shared details of its world-first innovation at the UN Climate Conference in Egypt (COP27).

King & Wood Mallesons assisted on the project – officially titled Project Genesis 2.0 – which leveraged blockchain, smart contracts, internet of things and digital assets for green bond distribution and improving transparency on the use of proceeds. Since the pilot project, Hong Kong has taken yet another step in the direction of becoming a global sustainable finance hub, issuing HK$800 million of tokenised green bonds.

Here, we share details of the innovative market-first Genesis 2.0 product and how it is set to transform the green finance space and inspire future instruments and financial systems evolutions.


Improving the integrity of carbon credits has become an increasingly important goal as the world looks to decarbonise.

Steered and launched by the Bank for International Settlements’ Innovation Hub in Hong Kong in late 2022, the innovative Genesis 2.0 pilot project showcased the latest evolution for bonds. One where blockchain, debt markets and carbon markets intertwine.

This holds a promise for carbon trading everywhere: beyond scandals and uncertainty, towards a smart contract-based solution. The smart contract at the heart of the pilot comprised a digital green bond and digital “mitigation outcome interests” (MOIs) that are repayable in carbon credits and can decouple (in time).

The attachment of MOIs enables a true ‘green’ premium to reflect the quality of the bond and its carbon credits. It also introduces a verification process, improving integrity and bringing investor certainty.

The location of the pilot is also important. Hong Kong is looking to become a global and regional hub for sustainable finance. In February 2023, in yet another move in that direction, the Hong Kong Government issued HK$800 million of tokenised green bonds.

Green bonds issued globally topped US$2 trillion by September 2022, according to the Climate Bonds Initiative. An important instrument in the transition to a net zero economy, efforts to bolster their integrity are critical. We have an ongoing relationship with BISIH and keep a keen eye on developments.

As highlighted in the priorities for private finance for COP26, one of the goals is to encourage a transparent, credible market structure that is required for scaling a liquid, transparent and reliable voluntary market, alongside parallel initiative ensuring that these markets have the highest level of environmental integrity.” – BIS, Project Genesis 2.0

How it works: a true ‘green’ premium for digital carbon credits

The problem: the market is not (adequately) rewarding investors for choosing ‘green’

The primary driver for investment in most green bond issuances is the credit quality of the issuer. Knowing the proceeds are earmarked to fund green projects is an added benefit.

This is because there is little scope in current markets for investors to be rewarded (apart from meeting their own objectives) for the benefits of green projects being funded with their investments. In addition, the accountability of issuers under existing green bonds is relatively light.

Green bonds are differentiated in most definitions by reference to the use of the proceeds to finance ‘green’ projects, acquisitions or activities.

The Project Genesis fix: a world-first product designed to verify green bonds

The Genesis 2.0 instrument addresses these limitations by attaching a carbon credit token to a green bond. At the same time, this allows the digital issue and trade of carbon credits.

The token attached is a Mitigation Outcome Interest (MOI). This represents an obligation by the bond issuer to deliver a Mitigation Outcome Unit (MOU) – here, carbon credit units.

The investor pays a premium on investment and receives back carbon credits (the MOUs) to repay that investment at a future point in time when certain greenhouse gas (GHG) emission reduction goals are met. The issuer may generate MOUs through activities financed by the proceeds of the bond. It can choose to cover any shortfall with purchased carbon credits, up to a set limit.


The “bank for central banks” is how the head of BIS Innovation Hub Hong Kong Centre Bénédicte Nolens has described the almost 100-year-old Bank for International Settlements.

The 63 central banks – from the Bank of Algeria to the State Bank of Vietnam - which co-own BIS represent countries accounting for roughly 95% of global GDP.

Apart from acting as that “bank for central banks” delivering competitive financial services, BIS gives banks a forum to exchange information and cooperate on financial stability, undertakes in-depth economic analysis and acts as an “independent voice” to policymaking.

Technology is changing the way financial systems work and central banks must respond. BIS’s Innovation Hub is focused on identifying trends, developing tools to improve the global financial system, and bringing central banks together to share knowledge (including via the BIS Innovation Network launched in January 2021).

It’s comprehensive work program contains the most critical developments in the market:

  • Central Bank Digital Currencies (CBDCs)
  • Suptech and regtech
  • Next-gen financial market infrastructures
  • Open finance
  • Cybersecurity
  • Green finance.

Each has a working group chaired by members of central banks around the world. This includes the Reserve Bank of Australia head of innovation lab Susan Slocum, who chairs the Suptech and Regtech working group.

The green finance group – the one most relevant to the Project Genesis innovation for green bonds – is chaired by the Central Bank of Ireland’s deputy governor of financial regulation Sharon Donnery.

Based in Basel, Switzerland, BIS also has offices in Mexico City and Hong Kong – the home of Project Genesis.

The genesis of the digital ‘green bond’ project

BISIH began exploring the digitisation of carbon-cutting instruments in 2021, with the help of a handful of global banks and advisers including KWM, InterOpera, Allinfra and Goldman Sachs.

By year-end a first prototype was ready, to digitally track, deliver and transfer MOIs. A year later – in October 2022 – the second prototype was launched, introducing an interoperable host chain.

On November 9, 2022, Goldman Sachs presented Project Genesis 2.0 to COP27.

The features of the MOI closely track the Mitigation Outcome Security (MOS) proposed by Massamba Thioye of the UNFCC in his 2021 paper on the subject, Making Green Bonds Serve the Climate Goals.

Thioye identified the benefits of integrating the green bond and carbon markets as:

  1. Enhanced transparency, objectivity and environmental integrity
  2. No need to track the use of proceeds
  3. Optimal use of public climate finance to enable impactful climate action
  4. Advantages for green financiers, including as a source of capital gain
  5. Governments buying from financiers mitigation outcomes generated from developing countries can claim the mobilization of private climate finance for the benefit of those developing countries
  6. Operationalizing the disclosure of exposure to climate risks and opportunities
  7. Turning carbon finance into an ex ante enabler to access the international capital market
  8. Benefit compared to the EU Taxonomy combined with the EU Green Bond Standard
  9. Empowering financiers to play a greater role in addressing climate change
  10. Transfer of a tangible product the buyer must pay for as a condition for the bond to be green
  11. The bond and the green attribute of the bond, in the form of mitigation outcome, can be sold separately.
Stakeholders in financial markets, capital and investment represent important levers of change, as they have a key allocative role in society, and can enable investment into a net-zero low-energy future.” – Massamba Thiove, UNFCC Mitigation Program manager, ‘Making Green Bonds Serve the Climate Goals’

KWM’s role in developing the digital bond and token

KWM teams across DCM, Blockchain and Carbon Markets came together to assist with the early concept and prepare the template term sheet for MOIs.

Project Genesis 2 is an excellent example of the next evolution of digital bonds. The early concept involved testing a smart contract involving two limbs:

  1. a digital green bond reflecting traditional debt interests with a traditional fiat currency coupon; plus
  2. digital “mitigation outcome interests” that are repayable in carbon credits. These are initially attached to the bond but can be decoupled.

Not only was the concept innovative, but the pilot involved working through the actual terms of issuance and KWM producing a detailed template term sheet. This required carefully mapping and resolving the legal and regulatory context and addressing multiple “what ifs”.