Last week, I wrote about impact investing and mentioned that one of the ways of financing such projects is via bonds—green, social and sustainability ones.
As a result, readers reached out to me asking that I shed more light on the three bonds as a standalone topic. In their interest, I’ll seek to deepen this subject today.
I’ll start off with green bonds, the most common of the three fundraising instruments in public markets geared towards impact investing. Proceeds raised on the capital markets through green bonds essentially fund climate adaptation and emissions reduction projects while, at the same time, promising sustainability-focused investors a return.
This includes a portfolio of climate-smart projects that serve to boost resilience against effects of climate change through prudent use of natural resources such as renewable energy, energy efficiency, recycling and green buildings. Others are sustainable agriculture and transportation.
Green bond, the front-runner of the trio, has since opened the market for other types of bonds with a sustainability focus—social, sustainability and climate as well as blue bonds, whose aim is to enhance ocean and coastal resilience.
A sum of $631 billion had been raised from 1,971 issued green bonds as of 2019, accounting for 84 percent of the sustainability-inclined class of bonds, according to World Bank Group. The first issuance went out in 2007.
Growth of green bonds is seen to help push a thicker flow of green/climate finance towards preserving the planet, and by extension human existence.
The green bond market, however, remains relatively nascent in emerging markets and sub-Saharan Africa, though it shows promising green shoots for exponential growth in future. Closer home, Acorn Holdings raised $41 million in 2019 towards building sustainable student accommodation units in Kenya, making it the first green bond offering in the country.
Similar to green bonds, social bonds target a specific cause in the society over and above the profit goal. In this case, investors in social bonds pursue not only financial returns from their investments but also look to contribute to positive social outcomes. A typical social bond should provide access to capital for projects that contribute to socioeconomic advancement and empowerment such as affordable housing and infrastructure, access to essential services such as healthcare, energy and education, as well as employment generation and food security.
In 2019, a total of 44 social bonds were floated across the globe, raising $16 billion. This saw the size of the market for outstanding social bonds grow to $42 billion.
Following Covid outbreak early last year, social bond floats have further ballooned. They have become an appealing asset class to investors looking to achieve positive social outcomes alongside a financial return. This recent popularity is driven by Covid-19 bonds, also known as corona bonds or pandemic bonds, structured as social bonds. The proceeds of Covid-19 bonds aim to address or mitigate socioeconomic shocks set off by the coronavirus outbreak, whose impact has affected firms, piled pressure on hospitals and rendered millions jobless.
Lastly, sustainability bonds are a hybrid of green and social bonds and finance a mix of both green and social projects. As of 2019, there were 193 sustainability bonds outstanding, with a total value of $74 billion. Recognising the growing need to finance both environmental and social goals in lockstep, sustainability bonds offer issuers the opportunity to fund a blend of social and green projects with their proceeds. This effectively fashions them as a crucial financing vehicle for Sustainable Development Goals (SDGs).
Green, social and sustainability (GSS) bonds appeal to investors as a straightforward instrument to integrate environmental, social, and governance outcomes into fixed income portfolios. These asset classes often offer similar yields, ratings, and return profiles to other fixed income investments.
However, though increasingly popular, sustainability-inclined bonds only make up a tiny fraction of the overall bond market.
Green, social and sustainability bonds represent less than one percent ($747 billion) of the $100 trillion global bond market.
Policymakers should, therefore, strive to develop attractive regulations, frameworks and products to support the industry’s future growth.
As a fundraising tool for impact investments, sustainability-inclined bonds could concurrently generate financial returns and ensure social and environmental good. Beyond creating new paths towards a healthier planet, impact investing can help eradicate extreme poverty in the society, wipe out hunger and attain food and energy security, as well as expand access to clean drinking water, healthcare and education.
This article was first published by the Business Daily