A rapidly-growing sector, Sustainable Bonds are designed to finance societal projects and/or to demonstrate sustainability objectives. According to Bloomberg, the Sustainable Bond category has grown to $1.9 trillion as of the end of 2021, and could exceed $5 trillion by 2025.
With growth in market size has come a growth in appreciation of what sustainable investors seek. When properly structured and with transparent reporting, investors can monitor both impact results and financial results.
To “Green and Beyond”
The Sustainable Bond asset class consists of four segments:
- Green Bonds, with proceeds funding Environmental projects, were roughly 60% of the market at the end of 2021.
- Social Bond projects address the challenges which have become increasingly apparent during the pandemic, such as health and education.
- Sustainability Bonds fund projects with Societal impact, both Environmental and Social.
- Sustainability-Linked Bonds offer transparency to investors in exchange for an attractive financing cost to the borrower. If the project falls short of the promised goals and measurable Key Performance Indicators (KPIs), the borrower must pay a higher interest rate.
The relatively new Sustainability-Linked segment, first issued in 2020, is growing rapidly. This new instrument is encouraging investment where it is needed. During 2022, a fifth of EM corporate bond issues are expected to be Sustainability bonds.
This is a powerful example of the role of finance in channeling investments towards goals along with returns.
The UN Sustainable Development Goals – A Roadmap
Investors and issuers are increasingly using the SDGs as a common language to describe the types of impact they wish to achieve.
Candriam’s newest Sustainable Impact Bond strategy, attempts to measure and report against the 17 SDGs
For example, projects which would help provide and train the army of new health workers needed in low- and middle-income countries would fall under SDG 3, “Good Health and Well-Being”, for impact reporting. A sample KPI for a particular project or bond issue could include the number of new physical therapists accredited per year.
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