What is a sustainability bond?
A sustainability bond is a bond that is designated to finance and re-finance green and social projects. It is aimed to provide social and environmental benefits.
It can be issued by the government or companies following the Sustainability Bond Guidelines (SBG) together with the Sustainability-Linked Bond Principles (SLBP) of the International Capital Market Association (ICMA).
Both serve as a guide to take full disclosure, transparency, and reporting of sustainability bonds.
As of May 2022, the global issuance of green, social, sustainability, and sustainability-linked (GSSS) bonds accumulated a total of $203 billion in the first quarter of 2022.
Due to the ongoing Russian invasion of Ukraine, this amount is 11% lower from the fourth quarter of 2021 and 28% from the first quarter of 2021.
Challenges may occur in the sustainable bond market, and the practice of greenwashing may be the primary cause. It aims to mislead stakeholders with the intention of appearing as a positive environmental effect of the sustainable bond proceeds.
In this case, there is a need for an investment manager to take control of assessing security documentation to verify the use of proceeds and their expected outcome.
How does it differ from a sustainability-linked bond?
Sustainability-linked bond is used by the issuer to finance the projects linked to achieving of sustainable development goals (SDGs).
This type of bond plays a vital role in urging organizations to commit to sustainability initiatives aligned with United Nations’ Sustainable Development Goals (SDGs) and Paris Agreement.
How does a sustainability bond work?
Projects for sustainability bonds are considered eligible if they align with green and social bond categories. They must have been composed of the four components of both Green Bond Principles (GBP) and Social Bond Principles (SBP):
- the use of proceeds,
- the process of project evaluation and selection,
- management of proceeds, and
The proceeds may be used for a variety of purposes, such as research and development, education, innovation of public health facilities, and others.
In 2020, big financial institutions like JP Morgan, Mastercard, and Bank of America issued sustainability bonds to support renewable energy projects and housing projects.
For the year 2022, experts forecasted growth for sustainability bonds at around $175 billion and $150 billion for sustainability-linked bonds.
Why should you invest in a sustainability bond?
Sustainability bonds offer a variety of benefits to both issuers and investors. Wealthy investors have the opportunity to purchase unlisted deals, which businesses and sectors can tap into.
Investing in sustainability bonds can reduce long-term sustainability risks such as a challenge to the carbon economy.
Sustainability bonds are considered a defensive play to fight for a sustainable future. It is also a means for investors to align asset allocations with sustainability objectives aiming to accelerate positive social and environmental change.
Over the last few years, there has been a significant boost in green, social, and sustainability bond markets on account of a variety of factors such as increasing awareness of the social impact and solid environmental regulations.
Ultimately, the labels green, social, and sustainability need to meet the set criteria. Whatever the case, all of them have emphasized initiating environmental sustainability objectives.