Green finance has seen tremendous growth in 2021, with sustainable bonds financing issuance totaling $859 billion. While this sounds like good news at a time of accrued environmental awareness, a quick behind-the-scenes glance gives a more comprehensive (and contrasted) view of what the growth of sustainable bonds entails.
Sustainable bonds are used to refer to a variety of financial tools. While all sustainable bonds aim at raising debt financing against interest payments over time & ultimately the repayment of the principal, several instruments can be used:
1. Green bonds (bonds whose end-goal is to support environmentally friendly projects)
2. Social bonds (bonds whose end-goal is to support projects with positive social externalities)
3. Sustainability bonds (bonds funding projects focusing on environmental, social, and governmental matters (ESG))
Moreover, in addition to the interest repayments to investors, sustainable bonds promise a comprehensive review of the investment impacts and the supported-projects positive externalities. Moreover, regulators are stepping in, with an increasing request for increased transparency & better disclosure.
Yet, despite additional costs related to tracking and disclosure activities from issuers, sustainable bonds trade at par (for the same price) with traditional bonds, free of the “green” stamps & disclosure expectations.
Why is that? Green bonds’ extra issuance costs for issuers balances with positive externalities. These include positive tractions from holding green assets to diversify their investor base (and attract previously reticent investors with ESG-focused instruments). Additionally, green bonds permit issuers to diversify portfolios, lowering risk exposure. Finally, green bonds contribute to a positive marketing story for their issuers, and voluntary disclosure on green bonds reduces auditing costs of “green claims”.
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References
- https://www.climatebonds.net/market/explaining-green-bonds
- https://www.refinitiv.com/perspectives/market-insights/sustainable-finance-surges-in-popularity-during-h1-2021/
- https://www.investopedia.com/terms/b/bond.asp
- https://www.reuters.com/markets/commodities/global-markets-esg-2021-12-23/