Sustainability bonds are debt instruments used to raise capital for sustainable projects, companies, or public entities that have a positive impact on the world. Raising debt through sustainability bonds allows companies whose actions have a positive environment and social impact to raise capital.
Sustainability bonds combine social bonds and green bonds, goals to offer investors a debt instrument that combines both. The solution is ideal for companies that would otherwise be constrained in raising capital. Companies that promote environmentally, and social causes now have an easier way to access capital markets.
Through sustainability bonds, companies that would otherwise not be able to access capital, now have the chance of raising funds. Overall sustainability bonds ease the process of raising capital for these companies. Although this is a relatively new debt instrument that aims to promote sustainability, these bonds are expected to reach $650B by this year. With the sustainable finance market increasing by roughly 10 times in 2020, compared with 2019.
Why were sustainability bonds created?
Humanity is increasingly concerned about sustainability, and the environment. The trend has pushed financial institutions to revise the products they offer. One of the first examples of this was the first green bond issued by the World Bank in 2008. Investors are more concerned than ever about social and environmental problems. This has made investors increasingly more wary over the impact their investments have in the world around us.
What defines a sustainability bond?
There are a few features that define whether a bond is eligible to be considered a sustainability bond. The International Capital Market Association (ICMA) determines the guidelines for sustainability bonds. The Social Bond Principles (SBP), as well as the Green Bond Principles (GBP), are divided into two components. The use of the proceeds, and general purposes.Source: ICMA
Use of the proceeds
One of the most important is how the proceeds from the debt raised are going to be used. There is a specific process in which each bond is analyzed based on how the proceeds will be used, and are selected based on that. ICMA also evaluates the management of the proceeds, and how it is reported.
To be able to analyze whether the proceeds and the project are in line with expectations ICMA defines KPIs to track how the money is used. Companies will have to follow ICMA’s guidelines, in order to achieve the established KPIs. This is a way of controlling how companies are using the proceeds, and how efficient they are in their investments. Along with ICMA, companies set out sustainability performance targets that should be met.
There are also some more general aspects that are taken into consideration, like the bond characteristics. Reporting is also important so that ICMA could monitor whether companies report truthful metrics.
What kind of projects get funded?
There are several projects or entities that are eligible to issue sustainability bonds. These projects might try to mitigate food insecurity or affordable housing for lower-income families. It can also be environment-friendly infrastructure, or research and development projects that have the goal of having a positive social and environmental impact.
Why invest in sustainability bonds?
If you are an investor that is concerned with sustainability, and the future of planet Earth this might be a good investment for you. These bonds target conscious, and responsible investors. Investors that are interested in having a positive impact on humanity. It allows you to combine both your investment goals, with your desire to help and improve life for all of us.
Financial markets are increasingly changing. The newer generations are more concerned than ever, about how their investments impact the real world. This shift towards environmental and sustainability-friendly investment vehicles is set to perdure for the years ahead. This shift in mentality will continue to change the way investors view debt-backed instruments. Sustainability bonds allow investors to get a return on positive environmental and social impact.
Having instruments such as sustainability bonds, allows us to invest with social responsibility. They will be increasingly more common, as institutional, and retail investors become more conscious of the impact their investments can have.
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