The expansion of the green bond market, which is contributing to environmental welfare, reflects the emergence of impact investment in fixed income. To encourage social prosperity, the market was expanded with new impact investment instruments in the form of social and sustainability bonds. With the Paris climate agreement and the release of the UN Sustainable Development Goals, a vibrant increase in green, social, and sustainability partnerships began (UN SDGs).
The green bond market has grown at a far quicker rate than the market for social and sustainability bonds since then. The green bond market is currently worth EUR 300 billion, which is eight times the total value of the social and sustainability bond markets.
All stakeholders benefit from the introduction of new impact investing products in fixed income. These products provide issuers a novel financing strategy and increase market transparency by forcing issuers to disclose their ESG practices. Furthermore, through increasing environmental and social welfare, revenues from green, social, and sustainability bonds benefit society as a whole. Demand for impact investing products is expected to continue to rise.
Identifying green, social, and long-term sustainability bonds
Green, social, and sustainability bonds have comparable financial features to regular bonds in terms of form, risk, and returns. They might be corporate or government-related, range in credit quality from investment grade to non-investment grade, have different maturities (short or long-term), and have different interest rates and yields. Most green, social, and sustainability bonds are “use-of-proceeds” bonds, which are backed by the full balance sheet of the issuer. They have the same level of security as traditional bonds. As a result, the yields and projected returns are comparable to those of the identical issuer’s regular bonds. The major distinction between green, social, and sustainability bonds is how the revenues are distributed.
These bonds are used to fund new and current projects or activities that have a positive impact on the environment. We think that impactful green bonds should be issued in accordance with the International Capital Market Association’s (ICMA) Green Bond Principles (GBP), a set of voluntary rules that promotes more open, consistent reporting on bonds’ environmental aims and effect estimates. In reality, because ICMA sets standards for all types of green, social, and sustainability-related bonds, it is relevant.
To be classified as a social bond, the profits must be used to fund or refinance social initiatives or activities that have a positive social impact and/or address a social problem. In many situations, social initiatives are directed towards low-income individuals, marginalized communities, migrants, jobless people, women and/or sexual and gender minorities, people with disabilities, and those who have been displaced.
Similar to green bonds, issuance of social bonds is guided by a set of voluntary standards aimed at improving openness and transparency in the social bond market — in this case, the ICMA’s Social Bond Principles (SBP). The SBP lays out recommended practices for issuing a social bond and provides investors with the information they need to assess their investments’ social effect.
In the form of COVID-related relationships, a new sort of social bond has recently emerged. The profits from these bonds will be utilized to address COVID-19-related social concerns, with a special focus on the most vulnerable people.
Sustainability bonds are issued with the intention of using the profits to fund or re-finance a mix of green and social initiatives or activities. Companies, governments, and municipalities can issue these bonds for assets and projects, and they must adhere to the ICMA’s Sustainability Bond Guidelines, which are linked with both the GBP and the SBP. They might be unsecured, backed by the business or government issuer’s creditworthiness, or secured with collateral on a specific asset.
Differences between green bonds, social bonds, and sustainability bonds
Green bonds are financial instruments whose revenues are primarily used to (re)finance new and/or current climate or environmental initiatives. The most typical use of profits is to invest in renewable energy, low-carbon construction, and energy efficiency.
With a neutral or positive environmental impact, social bonds are used to partially or totally (re)finance new and/or current social welfare investments for a specified target group. The most typical uses of revenues are affordable housing and community development.
Green and social bonds are combined in sustainability bonds. They are anticipated to help the selected target group in terms of both environmental and social advantages. Sustainability bonds, like green and social bonds, can be used to partially or totally (re)finance new and/or existing projects. The revenues are utilized for a variety of purposes, including education and sustainability research, educational modernization, and public health facilities.
Green, social, and sustainability bond markets have seen a significant uptick in the last four years, owing to factors like stronger environmental legislation, increased awareness of social impact, and a shift in investor perception toward a more sustainable allocation of their wealth without sacrificing returns.
The green, social, and sustainability bond market is dominated by governments and financial institutions. We anticipate that governments will continue to drive the development of social and sustainability bonds, as they are more likely than companies to fund social prosperity projects.
The issuances in the social and sustainability bond market are overshadowed by green bond issuances, making green bonds a more liquid choice for investors. Green bonds are more diversified than social and sustainability bonds in terms of all major criteria: nation, sector, currency, and credit rating.
Europe is the most important market for green, social, and sustainability bonds. The Asia-Pacific market, which is dominated by China, is not far behind, but international investors are sometimes shut out of investment possibilities. Onshore issuances account for the majority of China’s issuances.
While the creation of the guiding principles has strengthened the integrity of the sustainable bond market, investors may still confront “greenwashing,” or issuers misrepresenting the positive environmental effect of bond revenues. Greenwashing is possible owing to the absence of official issuance rules in many emerging markets and the relatively wide criteria for what defines a green bond. These difficulties highlight the need of a security documentation review by an investment manager to establish the underlying use of profits and the projected impact.