Green bonds have received increasing attention over recent years, as key instruments to financing the transition to a sustainable, low-carbon economy. Other fixed income instruments such as social, sustainability, blue and sustain-­ability-linked bonds are gaining traction in attracting private capital to initiatives geared towards responding to other global needs.

Green, social and sustainability bonds

Subject to the same capital markets regulation applicable to traditional debt listings, the notable additional features exclusive to sustainable debt issuances emanate from a voluntary set of principles intended for use by market participants, formulated by the International Capital Markets Association (ICMA).  These adopt a ‘use of proceeds’ model, in that the bond proceeds must be applied exclusively to finance or refinance new and, or existing environmental, social and sustainable development projects. Such projects, and intended use of proceeds, should be appropriately described in the offering documentation. The principles also recommend that an issuer’s management of proceeds be supplemented by the use of a third party to verify the allocation of funds.

Since the first green bond issuance by the European Investment Bank in 2007, the green bond market has grown exponentially, having gone from the periphery of the capital markets to one of its fastest-growing segments. In fact, global green bond issuance climbed by nearly 50 per cent last year to a record high of almost USD255 billion, an analysis by the Climate Bonds Initiative shows.

Interestingly, in the wake of the COVID-19 pandemic, ‘social’ bonds, the proceeds of which should be earmarked to address impacts of the outbreak, have gained popularity and could well be on track to outperform the green bond market this year, experts forecast.

Blue bonds

Blue bonds have huge potential to help unlock the ‘blue’ economy, while also protecting the marine environment. This pioneering debt instrument follows the same components of the ICMA principles, differing slightly in that the bond proceeds must be used specifically to finance ocean-based projects.

Sustainability-linked bonds

Sustainability-linked bonds (SLBs) incentivise the issuer’s achievement of predetermined and externally verified sustainability objectives through ‘key performance indicators’ and ‘sustainability performance targets’. In that sense, issuers would be committing explicitly to future improvements in sustainability outcomes within predefined timelines.

Contrary to other sustainable debt finance options, the proceeds of SLBs may be used for general purposes. This flexibility tends to render SLBs an ideal alternative sustainable product for those issuers currently invested in the fossil fuels sector but seeking to finance their transition to greener business activities.

Ultimately, the scalability of the sustainable bond market is dependent on a paradigm shift in mentality. Embracing and supporting product innovation, development and incentivisation in the sustainable finance space works for all − issuers, investors, regulators and policymakers, all of which are encouraged to collaborate in the drive towards redirecting the capital markets down this path.

This piece forms part of Camilleri Preziosi’s ‘Sustainable Finance’ series, in which members of the firm’s Capital Markets and Finance practice groups explore and evaluate emerging trends and opportunities in the sustainable finance economy. For more information, contact malcolm.falzon@camilleripreziosi.com.