The growing awareness of governments, businesses and wider society of the need to tackle major environmental and social challenges has spawned greater demand for innovative sources of public and private loan finance across a broad spectrum of sectors.
Green bonds to tackle global warming
The European Investment Bank and the World Bank issued the first green bonds in response to the 2007 IPCC report linking human activities to global warming. The aim was to address this major challenge with the help of financial markets, specifically via the bond market.
The idea behind green bonds is to provide a source of capital for projects or activities that have a positive impact on the environment. Major areas of focus are sectors such as renewable energy, low-polluting transport, green building construction, water management and pollution control.
Bonds that address poverty, inequality and social exclusion
Social bonds have a different focus. They are designed to support projects and activities that address a social issue, including combating poverty and providing social housing, or striving for greater equality, diversity and social inclusion.
As part of the response to the Covid pandemic we have seen huge growth in issuance of social bonds.
For example, the EU’s EUR 100 billion Support to mitigate Unemployment Risks in an Emergency (SURE) programme was launched to give member states the financial means to fight the negative economic and social consequences of the coronavirus outbreak. Other government-backed programmes have issued debt to bolster unemployment initiatives, helping preserve jobs amid the severe economic shock.
Finally, sustainability bonds involve debt raised to finance projects that have both environmental and social goals, these two aims often being linked. As such, they can be effective in addressing the objectives of a number of the UN’s Sustainable Development Goals.
Exhibit 1: A wide range of sustainable bond types to address different challenges
Source: BNP Paribas Asset Management, July 2021
Beware ‘social washing’
It should be noted that not all social bonds are created equal. Investors need to be on the lookout for ‘social washing’ – where issuers say proceeds will go to certain causes when funds are actually directed elsewhere, for example, to areas that do not maximising the positive impact on society.
The International Capital Markets Association’s Social Bond Principles(SBP) provide strong guidelines to determine the types of projects considered eligible for funding by these securities.
At BNP Paribas Asset Management, we assess social bonds based on these principles. In particular, we verify the alignment of the social ‘use of proceeds’ with SBP-eligible categories and their contribution to ‘social sustainable development goals’ (SDGs).
Europe – The global leader in green, social and sustainability bonds
Green, social and sustainability bonds have quickly carved out a place for themselves. In 2021, nearly USD 650 billion of these types of bonds were issued, twice the amount issued in 2019. [1] According to Moody’s, this market could grow to USD 1 350 billion by the end of 2022. [2]
While green bonds dominate, representing nearly 60% of issues in 2021, social and sustainability bonds have been on the rise, a trend probably linked to the social issues that have been – and still are – at the heart of the Covid health crisis.
Europe dominates the global market. In 2021, governments and companies in the region issued 56% of green bonds (vs. 32% in 2017), 71% of social bonds and 60% of sustainability bonds.
This is a market underpinned by demand from (mainly institutional) investors, by regulatory advances (including Sustainable Finance Disclosure Regulation), as well as by the European Commission’s commitment (e.g. the SURE programme). Determined to become a leader in sustainability finance, the EU issued its first green bonds in October 2021 to finance European companies involved in the ecological transition.
BNP Paribas Asset Management’s participation
To meet the growing demand from investors who wish to participate in this market, BNP Paribas Asset Management has developed a strategythat replicates the JPMorgan ESG Green, Social & Sustainability IG EUR Bond index.
This GSS strategy offers investors exposure to green, social and sustainability bonds issued by sovereigns, quasi-sovereigns, companies and supra-nationals.
References
[1] Source: Moody’s and Environmental Finance
[2] Source: Moody’s, ESG, Sustainable bonds to hit record USD 1.35 trillion in 2022
3 ESG: environmental, social and governance
Disclaimer
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
