We have seen an exponential growth in the Environmental, Social, and Governance aspect of investing. A large attention from the ESG market are bonds. Bonds are fixed income instruments representing a loan made by an investor to a borrower (typically corporate or governmental). These loans then pay investors interest depending on the rating of the investment, so if a bond is considered high risk (junk bond), then the premium paid to investors would be higher. On the other hand, if the risk is considered low (investment grade), its premium would be lower. In this article, we will go through 6 types of bonds concerning ESG fixed income and its future. 

For the sustainability you don’t yet know.

The ESG Bond Market

Written by Andrew Kaprielian

 

2021-09-12

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We have seen an exponential growth in the Environmental, Social, and Governance aspect of investing. A large attention from the ESG market are bonds. Bonds are fixed income instruments representing a loan made by an investor to a borrower (typically corporate or governmental). These loans then pay investors interest depending on the rating of the investment, so if a bond is considered high risk (junk bond), then the premium paid to investors would be higher. On the other hand, if the risk is considered low (investment grade), its premium would be lower. In this article, we will go through 6 types of bonds concerning ESG fixed income and its future. 

A Green bond is one where the issuer uses the proceeds made by the bond to invest in environmental projects which are typically linked to the issuer’s balance sheet (what they own). These bonds currently hold a $1 trillion bond capitalization and currently are 8% of the total bonds issued in 2021. Usually, the issuers include Governments and Nonprofit organizations such as the World bank. 

A Blue bond (probably the most niche) is one where the proceeds are used to finance projects related to ocean conservation so think of managing plastic waste and promoting marine biodiversity by ensuring sustainable, clean, and ecologically friendly developments. These bonds are usually issued by governments to fund local marine projects.

A Social bond is one where the proceeds are used for social outcomes such as access to education, affordable housing, and improving food security. This was particularly famous due to the Covid-19 pandemic so healthcare can buy medical goods and medical research was funded for emergency vaccine development. 

A Sustainability bond is used to finance a combination of green and social projects. Last year, Alphabet issued a $5.75 billion bond which became 8% of the total sustainable bond market. The investment was used to finance energy efficiency due to the number of data centers.

A Transition bond are securities issued with the purpose of shifting brown industries (high carbon emitting) towards a greener future. This would accelerate the need for funding rather than going through the traditional channels. Etihad airways issued a transition bond in 2020.

A Sustainable-linked bond (SLBs) have a different framework, the organizations that issue these bonds have no restrictions on the use of funds, however certain predetermined sustainability objectives need to be met. If these targets are not met, the organization is forced to pay a premium to investors as they are less ESG friendly. Corporations such as banks usually issue such bonds in order that their operations hit sustainable targets and pay less interest to investors.

The market for ESG bonds is becoming much more popular nowadays as the world’s largest funds such as Blackrock are pushing for a more sustainable future. Next steps needed to be taken are that conditions on these bonds should be met with legal consequences in case money is misused. Currently there is no form of legal green accounting that companies need to go through when it comes to these bonds however some companies do go out of their way to get a certification from the Rainforest Alliance or the World Wildlife Fund. 

https://www.bondvigilantes.com/insights/2021/02/green-bonds-blue-bonds-esg-bonds-galore-a-beginners-guide-for-fixed-income-investors

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