Any project or activity with the aim of providing a positive impact on the environment or within society can be given financial backing through the means of green, social and sustainability bonds. Distributed by companies and governments alike, these instruments are becoming more and more of an important tool in recent years and have become a vital cog in global fixed income markets. According to Refinitiv, in 2020, approximately $500 billion of sustainable bonds were issued, a new annual record, and according to Moody’s the market is to grow further and reach up to $1,350 billion by the end of 2022. However, to be given these bonds, you must meet certain criteria. Therefore, what must be met and in what ways do green, social and sustainability bonds relate and differ?
Green bonds are primarily used to finance new and existing projects or activities that contribute substantially to environmental objectives. Project categories eligible for green bond issuing include energy efficiency, pollution prevention, renewable energy, and climate change adaptation.
The very first green bonds were issued back in 2008 by the European Investment Bank and the World Bank concerning the 2007 IPCC report concerning human activities and their connection with global warming. The goal was to tackle this key challenge through the medium of financial markets, particularly through the bond market. An example of large green bond issuance came in 2020 from car makers Volkswagen to boost its transition to electric vehicles.
Social bonds are utilized within social projects and activities that accomplish positive social outcomes and/or tackle a social issue. Projects granted with these bonds often target communities in under-developing nations that are suffering poverty, people living in marginalized nations, and people who live their lives with a disability.
Shameela Soobramoney, Chief Sustainability Officer of the Johannesburg Stock Exchange, says: “If you think about employment creation, building low-cost housing, contributing to education, those would be the types of things that would qualify under a social bond umbrella.”
In recent years, we have seen the distribution of COVID-related social bonds aimed to alleviate social issues that have been brought about because of the worldwide COVID-19 pandemic.
Sustainability bonds are fixed-income bonds provided to areas that are used to finance or re-finance a blend of green and social projects or activities. Issued by governments, companies, and municipalities, these bonds will need to follow the Sustainability Bond Guidelines from the International Capital Market Association.
Examples of sustainability bond issuers in 2020 include the Bank of America and Mastercard.
All three bonds issued must meet a set of voluntary guidelines known as the Social Bond Principles. The four components of these principles are the use of proceeds, project evaluation, and selection, management of proceeds, and reporting.
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Investing in green, social or sustainability bonds can present a variety of potential benefits. One of the main benefits is the ability to seize an opportunity and lessen any physical, transitional, and long-term sustainability risks. Despite the risks that come with decarbonizing the economy in a socially reasonable way, it also presents opportunities for working investors.
As demonstrated, the issuance of these bonds is continually rising. Responsible investing is becoming increasingly common and concentrating on sustainability backs growth over the medium- and long-term in an inclusive manner.
All three bonds provide investors with the chance to associate their asset distribution with sustainability objectives in a significant way. Additionally, by connecting with companies when they are required to fund-raise, investors can support the drive for sustainability commitments or detailed sustainable issuance and encourage social and environmental change.
SEE BELOW: Interview with Shameela Soobramoney, Chief Sustainability Officer of the Johannesburg Stock Exchange