Sustainability Bonds

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Sustainability Bonds are fixed-income financial instruments (bonds) where the proceeds will be exclusively used to finance or re-finance a combination of Green and Social Projects and which are aligned with the four core components of the International Capital Market Association (ICMA) Green Bonds Principles and Social Bonds principles. [1] [2] [3] [4] [5]

Contents

The main difference among green, social and sustainability bonds, lies in their sustainable categories for the allocation of proceeds, [2] sustainability bonds needing to combine both social and green categories.

The principles (ICMA)

ICMA principles are currently the most commonly accepted framework for green, social and sustainability bonds’ issuance. They are coordinated by ICMA, which provides not only administrative support but also guidance for their governance process. [1] [4] [5]

The four core components of the principles are: [1]

  1. Use of proceeds: Identify the set of green and social sustainable categories or list of projects and assets to be financed by the proceeds from the bond issuance.
  2. Process for project evaluation and selection: The process for selecting and evaluating eligible green and social projects using selection criteria identified by the issuer.
  3. Management of proceeds: Define the process for tracking, allocating and spending the proceeds of the bond.
  4. Reporting: Determines ‘what’ and ‘how often’ issuers have to disclose information to investors.

The proceeds of Sustainability Bonds need to be applied in both the Green project and Social project categories.

Green project categories suggested by the principles include: [1]

Social Project categories suggested by the principles include: [4]

Other international standards and frameworks examples are the International Climate Bonds Standards [6] and the ASEAN standards. [7]

Criticism and controversies

Several authors and studies have raised concerns about the risk of greenwashing, when revenues are not systematically applied to activities with positive environmental outcomes. Further indicating that this risk is accentuated by the lack of a clear and unique definition of what makes a bond "sustainable". [8] [9]

Another criticism is that most of the public and private sector players are more still concerned about the revenue-generating aspects and mainly using the ‘sustainability’ label as a competitive advantage in the business [10]

A new category of bonds known as sustainability-linked bonds (SLB), [11] tries to overcome these problems by penalizing the issuer with a step-up coupon in case of failing its sustainability performance target(s).

See also

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Nature-based solutions Sustainable management and use of nature for tackling socio-environmental challenges

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Sustainable finance or green finance is the set of financial regulations, standards, norms and products that pursue an environmental objective, and in particular to facilitate the energy transition. It allows the financial system to connect with the economy and its populations by financing its agents while maintaining a growth objective. The long-standing concept was promoted with the adoption of the Paris Climate Agreement, which stipulates that parties must make "finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development."

A Sustainability-linked bond (SLB) is a fixed income instrument (Bond) where its financial and/or structural characteristics are tied to predefined Sustainability/ESG objectives. The objectives are measured through predefined Key Performance Indicators (KPIs) and evaluated against predefined Sustainability Performance Targets (SPTs).

References

  1. 1 2 3 4 Migliorelli, Marco; Dessertine, Philippe (2019). The Rise of Green Finance in Europe: Opportunities and Challenges for Issuers, Investors and Marketplaces. SSpringer Nature. ISBN   9783030225100.
  2. 1 2 La Torre, Mario; Chiappini, Helen (2020). Contemporary Issues in Sustainable Finance: Creating an Efficient Market through Innovative Policies and Instruments. Springer Nature. ISBN   9783030402488.
  3. ↑ "Sustainability Bond Guidelines (SBG)". www.icmagroup.org.
  4. 1 2 3 "How to Issue Green Bonds, Social Bonds and Sustainability Bonds". www.ifc.org.
  5. 1 2 "Sustainability standards and labels". www.bourse.lu.
  6. ↑ "Climate Bonds Standard V3.0". Climate Bonds Initiative. 9 December 2019.
  7. ↑ "ASEAN Capital Markets Forum". www.theacmf.org.
  8. ↑ Weber, Olaf; Saravade, Vasundhara (2019). "Green Bonds: Current Development and Their Future". doi:10.13140/RG.2.2.10059.82722.{{cite journal}}: Cite journal requires |journal= (help)
  9. ↑ Jones, Peter; Comfort, Daphne (2020). "Sustainability Bonds and Green Bonds in the Retail Sector". International Journal of Sales, Retailing and Marketing. 9: 37-43.
  10. ↑ AlAhbabi, Rayeda; Nobanee, Haitham (18 February 2020). "Sustainability Bonds: A Mini-Review".{{cite journal}}: Cite journal requires |journal= (help)
  11. ↑ "Sustainable Bonds: Understanding This Growth Area". GARP.
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