ESG Bonds

Bonding over Green: The ESG Bonds

ESG Bonds

Environmental, Social, and Governance (ESG) Bonds is a term that covers a variety of green bonds,sustainable development bonds, and social bonds. The bonds inject funds into projects that have a positive impact on combating environmental or social challenges.

ESG bonds are increasingly accepted by companies seeking to increase their sustainability credentials and profile. The sense of urgency about the effects of climate change is driving companies to alter their environmental and social footprints for investors to continue to hold them in their investment portfolios.

The Environmental Social and Governance factors are a subset of non-financial performance indicators which include ethical, sustainable and corporate government issues such as making sure there are systems in place to ensure accountability and managing the corporation’s carbon footprint.

Green Bond Miletstones

Sustainable or ‘green’ bonds require the proceeds from their issuance to be used for sustainability-related purposes. The majority of green bonds to date target climate change. The World Bank is one of the largest issuers of green bonds globally.

Categories of ESG-labeled bonds

Following are the types of ESG Labeled Bonds:

Green Bonds:  Proceeds raised from a green bond are used toward projects and activities promoting a broad range of environmental objectives.Following are the types of Green bonds

  • Climate bonds: These target climate-change solutions such as mitigation- or adaptation-related projects and activities.
  • Blue bonds: These target projects in the “blue economy” — for example, development of marine energy or sustainable fisheries.
  • Transition bonds: These are for transition to cleaner fuels or energy sources, although not for zero-emission fuels.

Social Bonds: These bonds funds projects that provide access to essential services, infrastructure and social programmes to underdeveloped people and societies. The goal of social bonds is to achieve positive social impact.

Similar to green bonds, social bonds are often issued to address very specific and narrowly defined objectives. These include:

  • Covid Response Bonds:  Issuance started in 2020 with proceeds used to strengthen health-care infrastructure and alleviate the economic losses caused by the pandemic.
  • Affordable-housing bonds:  Issuance started in 2020 with proceeds used to strengthen health-care infrastructure and alleviate the economic losses caused by the pandemic.
  • Healthcare and Education bonds: Access to essential services such as healthcare and education.
  • Sustainability bonds: Green and social objectives are typically combined in sustainability bonds, with the proceeds going to projects or activities with either positive environmental or social impact, or both.

Sustainability-linked bonds: Unlike the use of proceeds for green, social and sustainability bonds, proceeds raised from sustainability-linked bonds are used for general purposes.

The coupon of sustainability-linked bonds is tied to the achievement of sustainability targets and failing to achieve them means the issuer is liable for an additional, pre-disclosed interest rate paid to the investors.

SDG-Linked Bonds: These bonds enable issuers to raise capital by specifically committing and advancing to SDG-related targets.

The World Bank has launched its first bonds linked to the SDGs through an initiative with BNP Paribas.

Sustainable Bond Issuance Trend

Conclusion

  • While investors now have a wide range of ESG-labeled bonds to select from, they need to conduct thorough due diligence – to analyze the specifics of each bond’s structure and to understand how it supports the overall sustainability strategy of the issuing company.
  • Securities labeled as environmental, social and governance (ESG) bonds will help create a better, more sustainable world.
  • Assessing an ESG-labeled bond means delving deeper than an issuer’s financials into the bond’s governing framework and its fit with the overall sustainability of the issuing company.

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