Every time we hear the word sustainability, we immediately associate it with the environment. The wellbeing of humankind is closely linked with the health of the environment.
To breathe clean air, drink fresh water, and live in healthy environments free from toxic substances and hazards, people need a clean environment.
The World Health Organization reports that 24% of deaths occur due to preventable environmental factors.
We as individuals should act to reverse these effects so that further damage is prevented to ensure a healthy living place for future generations to come.
For businesses, It means adopting environmentally sustainable practices to help build thriving communities and ensure future growth prospects.
How then can we individually contribute to environmental projects that are actually urgently needed?
This is where Green Bonds and other debt instruments like sustainability bonds, social bonds that support environmental conservation are increasingly finding their way into investors' portfolios.
So what exactly are green bonds? And how do they compare with - and differ from - social, sustainable, and sustainability-linked bonds?
Financial characteristics of green, social, and sustainability bonds are similar to those of traditional bonds (structure, risk, and returns). A corporate bond is typically a long-term or short-term bond, and their credit quality varies from investment grade to non-investment grade. They can also be short-term, long-term, have different interest rates, and generate different yields.
Green, Social and Sustainability bonds are "Use of Proceeds" bonds which means the proceeds will exclusively be used for a particular purpose, like financing new and existing projects or activities with positive environmental impacts.
They tend to have the same security as conventional bonds. Yields and expected returns are therefore comparable to those of the same issuer's normal bonds. The main difference between the green, social and sustainability bonds lies in their allocation of proceeds.
Green Bonds | Social Bonds | Sustainability Bonds |
Green bonds aredebtinstruments whose proceeds are used to finance new or existing climate- or environment-related projects. | Social bonds proceeds are used for and/or existing investments for the welfare and economic development of an identified target population (i.e. the poor, the unemployed, the vulnerable are partially or completely financed | Sustainability bonds are a mixture of both greenand social bonds. They are expected to provide environmental and social benefits for the identified target population |
Investments in renewable energy and low carbon building and energy efficiency are the most common use of proceeds | Affordable housing and community development are the most common use of proceeds | Education and sustainability research, modernization of education and public health facilities are among the many ways the proceeds are used |
There has been a significant increase in the green, social, and sustainability bond markets in recent years driven by factors such as stronger environmental laws, growing social consciousness, and investor perception towards a more sustainable future.
Governments and financial institutions dominate the green, social and sustainability bond market and it is expected that Social, Sustainable and Green Bonds will see further government push.