Sustainability Bonds Explained

Sustainability Bonds are fixed-income financial instruments (bonds) where the proceeds will be exclusively used to finance or re-finance a combination of Green and Social Projects and which are aligned with the four core components of the International Capital Market Association (ICMA) Green Bonds Principles and Social Bonds principles.^{[1] [2] [3] [4] [5]}

The main difference among green, social and sustainability bonds, lies in their sustainable categories for the allocation of proceeds, sustainability bonds needing to combine both social and green categories.

The principles (ICMA)

ICMA principles are currently the most commonly accepted framework for green, social and sustainability bonds’ issuance. They are coordinated by ICMA, which provides not only administrative support but also guidance for their governance process.^{[4] [5]}

The four core components of the principles are:

1. Use of proceeds: Identify the set of green and social sustainable categories or list of projects and assets to be financed by the proceeds from the bond issuance.
2. Process for project evaluation and selection: The process for selecting and evaluating eligible green and social projects using selection criteria identified by the issuer.
3. Management of proceeds: Define the process for tracking, allocating and spending the proceeds of the bond.
4. Reporting: Determines ‘what’ and ‘how often’ issuers have to disclose information to investors.

The proceeds of Sustainability Bonds need to be applied in both the Green project and Social project categories.

Green project categories suggested by the principles include:

• Energy
• Buildings
• Transport
• Water management
• Waste management & pollution control
• Nature-based assets including land use, agriculture and forestry
• Industry & energy-intensive commercial
• Information technology & communications (ICT)

Social Project categories suggested by the principles include:^[4]

• Affordable basic infrastructure
• Access to essential services
• Affordable housing
• Employment
• Food security and sustainable food systems
• Socioeconomic advancement and empowerment

Other international standards and frameworks examples are the International Climate Bonds Standards ^[6] and the ASEAN standards.^[7]

Criticism and controversies

Several authors and studies have raised concerns about the risk of greenwashing, when revenues are not systematically applied to activities with positive environmental outcomes. Further indicating that this risk is accentuated by the lack of a clear and unique definition of what makes a bond "sustainable".^{[8] [9]}

Another criticism is that most of the public and private sector players are more still concerned about the revenue-generating aspects and mainly using the ‘sustainability’ label as a competitive advantage in the business ^[10]

A new category of bonds known as sustainability-linked bonds (SLB),^[11] tries to overcome these problems by penalizing the issuer with a step-up coupon in case of failing its sustainability performance target(s).

See also

• Environmental finance
• Bond (finance)
• Climate bond
• Sustainability-linked bond

External links

• Sustainability Bonds - Massachusetts Bay Transportation Authority - first non-profit sustainability bonds in the U.S.

Notes and References

1. Book: Migliorelli . Marco . Dessertine . Philippe . 2019 . The Rise of Green Finance in Europe: Opportunities and Challenges for Issuers, Investors and Marketplaces . SSpringer Nature . 9783030225100.
2. Book: La Torre . Mario . Chiappini . Helen . 2020 . Contemporary Issues in Sustainable Finance: Creating an Efficient Market through Innovative Policies and Instruments . Springer Nature. 9783030402488.
3. Web site: Sustainability Bond Guidelines (SBG) . www.icmagroup.org.
4. Web site: How to Issue Green Bonds, Social Bonds and Sustainability Bonds . www.ifc.org . en.
5. Web site: Sustainability standards and labels . www.bourse.lu.
6. Web site: Climate Bonds Standard V3.0 . Climate Bonds Initiative . en . 9 December 2019.
7. Web site: ASEAN Capital Markets Forum . www.theacmf.org.
8. Weber . Olaf . Saravade . Vasundhara . Green Bonds: Current Development and Their Future . 2019 . 10.13140/RG.2.2.10059.82722.
9. Jones . Peter . Comfort . Daphne . Sustainability Bonds and Green Bonds in the Retail Sector . International Journal of Sales, Retailing and Marketing . 2020 . 9 . 37-43.
10. AlAhbabi . Rayeda . Nobanee . Haitham . Sustainability Bonds: A Mini-Review . 18 February 2020 . 10.2139/ssrn.3540119 . 219344518 .
11. Web site: Sustainable Bonds: Understanding This Growth Area . GARP.