Why Sustainable Bonds?
Environmental, social and governance (ESG) are the three main factors used to measure the environmental and societal impact of an investment in a company or business. Sustainable bonds have emerged as a popular means of funding, leading to a whole new market the big investment banks can tap. Investors continue to encourage companies to incorporate ESG considerations into their long-term strategies. There are three types of sustainable bonds; Green, Social and Sustainability bonds.
Key differences between an sustainable bond and a conventional bond
- Proceeds are used for general corporate purposes or debt refinancing
- No requirement to align CSR with funding schemes
- Use of proceeds not defined
- Application process not focused, and no transparency required
- No commitment to the environment or society
- Proceeds are used for green or socially important projects such as climate change and sustainable projects, to further a company’s labour practices and for affordable housing projects
- Investors are deeply engaged with company management to ensure alignment with ESG goals and CSR with funding schemes
- Predefined use of proceeds
- Application process focused on integrity and efficiency, and high transparency required
- Pre-commitment to the environment and society
Benefits of Issuing a Sustainable bond
- Strengthened reputation and publicity
- Viewed positively by regional regulators
- Investor diversification
- Alignment of CSR with funding schemes
- Commitment to social awareness
- Deeper engagement with company management to ensure alignment with ESG goals
- Investment in a socially important project at or near a commercial rate of interest
- Contribution to a better future
Benefits of Issuing an ESG bond
Sustainable bond – Project workflow
- Create a bond framework that is aligned to the Green Bond Framework and SDGs and tailored to include all eligible projects/expenditure
- Clear definition of qualifying projects/expenditure that the bond will finance
- There will also be a predefined negative list of projects
- This will align each category of projects to the relevant Green Bond Principles (GBPs)/ Social Bond Principles (SBPs) and relevant Sustainability Bond Guidelines (SBGs)
- Put in place governance structures to ensure correct project selection
- Put in place a governing body to ensure correct environmental and social risk procedures are followed
- This will require interdepartmental co-operation and coordination
- Clear and transparent governance in SF would mitigate any claims of “greenwashing”
- Appoint a third party to give a “second-party opinion” (SPO) on an issuer’s bond framework
- The SPO (and annual re-verification) ensures alignment with GBPs, SBPs and SBGs
- Once the SPO is received, the issuer could issue under this framework as many times as it wishes, to the extent of project availability
- A roadshow would ensure that investors have time to acquaint themselves with the issuer’s bond framework
- Issuance would happen on a standalone basis or via the issuer’s MTN programme
- Green use of proceeds and specific risk factors and framework-related disclosures to be wired into the bond documentation
- Annual allocation reporting will highlight the bond proceeds being allocated to predefined projects
- Impact reporting is optional but recommended, as it shows the tangible value of the green bond
- Specific green templates are available for such reporting
Surge in social bond issuance volume post-COVID-19
Being the youngest member of the sustainable bonds family, social bonds have always remained a small part of the multi-billion sustainable bonds market. However, with a number of social issues arising in the wake of the pandemic, the popularity of social bonds has been surging as majority of the investors see these financing instruments as an innovative way to address COVID-19-related issues, while meeting their funding needs.
Social bonds have enabled issuers to issue bonds with a powerful message and granted access to a broader range of investors with ESG considerations, increasing the appeal of social bonds and issuance volume.
Sovereigns and supranational agencies (SSAs) are leading social bond issuance volume in 2020
The European issuers led the surge in issuance volume, contributing c. 46% of total issuance volume, with French unemployment agency Unedic issued two record social bonds of EUR4bn each in Q2 2020, (as Figure 2 shows). CaixaBank issued a Covid-19 social bond of EUR1bn to finance SMEs and micro-businesses in the most disadvantaged areas of Spain.
COVID-19 RESPONSE BONDS ISSUED BY SSAS SINCE MARCH 2020
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