While impact investing has grown rapidly in private debt and equity markets, it is also attracting growing interest from retail and institutional investors that invest mainly in public equity and bond markets.
Green, Social, and Sustainability Bonds (GSS) come a relatively new impact-investment instrument. GSS bonds are use-of-proceeds bonds that identify the types of spending that are eligible to be financed with the bond proceeds. Impact investing using GSS bonds is possible if an investor buys the bond(s) with the intent for positive impact, and the issuer measures and reports to the investor on the impact that is directly related to the funds raised with the bond.
The GSS market is growing rapidly both in volume and range of investment structures. It encompassed $1.3 trillion in outstanding value by the end of 2020. Total issuance of green, social and sustainability bonds, as well as those issued by companies with a sustainable business model, such as renewable energy, equaled to $232 billion in the first quarter of 2022. The 19% drop over last year is a result of a surge in market volatility after Russia invaded Ukraine and tightening monetary policy around the world. Issuance across the broader market for Q1 2022 fell 5% to $2.5 trillion over the same period.
The rapid expansion of the G&S bond market has been accompanied by a broadening in formats. While in 2016-2018 classic green bonds – meaning those issued to finance a specific green project – accounted for 80 to 90% of the market, the proportion was 32% only in the first quarter of 2022. The rest of the market today is made up of social bonds (dedicated purpose for projects with a positive social impact), sustainability bonds (dedicated purpose for either green or social purposes) and sustainability-linked bonds (general purpose, with coupons linked to specific sustainability linked KPIs).
• Green bonds Green bonds usually trade with a lower yield than comparable conventional bonds because their availability is limited, and as a result they are more expensive for investors to buy. Green bond sales globally reached a record level of $474 billion in 2021, up from $296 billion in 2020, according to data by the Climate Bonds Initiative. The biggest growth region was Asia-Pacific, where companies sold $125 billion of green bonds during 2021, up from $55 billion in 2020. Utilities and financial institutions have traditionally been the most active issuers in the green bond market. From a geographical perspective, Europe remains the largest market for green bonds with around half of the total market share. Issuance in Europe jumped to $241 billion in 2021, from $157 billion over the same period. For Q1 2022 Europe sold $46 billion of green bonds with Germany and France as leaders, with $16 billion and $8 billion of green bond issuances, respectively. Regulatory initiatives are helping to propel further growth in the EU green bond market. The release of the first technical screening criteria under the EU’s taxonomy regulation has defined clear criteria for economic activity to be considered green, especially for industrial companies. Whereas In January 2022, Denmark issued its first green sovereign bond and declared it will raise regular funding through this instrument. Some $64 billion worth of sovereign green bonds were issued in 2021, up from $32 billion in 2020.
• Social and sustainability bonds Social and sustainability bonds have become an attractive instrument. In particular, social bonds are targeted to raise money for projects with positive social outcomes such as improving health or providing affordable housing issuance. After cumulatively issuing only $1.3 billion in social bonds in 2019, supranational institutions issued $67 billion in social bonds in 2020, primarily to support COVID-19 recovery efforts. While the pandemic has led to an enormous growth in social bonds issued, 2021 has overall shown a decline in social and sustainability formats as compared to the previous years. According to latest S&P data as of April 2022, social bonds saw issuance drop to $44 billion, a 55% decline over last year.
• Sustainability-linked bonds (SLBs) Beyond GSS bonds, the relatively new sustainability-linked bonds (SLBs) are almost exclusively issued by corporates. Sustainability-linked bonds embed key ESG performance indicators (KPI) that issuers commit to achieve at the company level, which triggers either a penalty (usually a higher coupon) should they fail to achieve the KPI or a reward (usually a lower coupon) if they achieve it. Unlike GSS bonds, the funds raised with this instrument are not tagged to a specific use of proceeds but can be used for general corporate purposes. The first SLB was issued in September 2019 by the Italian energy group ENEL. The European Central Bank announced that SLBs will be eligible as collateral for its asset purchasing program starting in 2021. S&P Global Ratings expects sustainability-linked bonds to be the fastest-growing subset of ESG bonds. In 2021, $92 billion of sustainability-linked bonds were issued, marking a 989% increase over the previous year, according to Ratings. Sustainability bonds also continue to increase their market share to 17% of the total versus 14% in the first quarter the previous year. So far in 2022, we have seen renewed interest in sustainability bonds combining green and social assets, this time by corporate issuers, although supply remains considerably dampened when compared to Q1 2021. Industry experts forecast that in 2022 the trillion dollar mark in the sustainable bond market will be exceeded as well.
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