ESG Bond Market Update 2020 & Transition Labels

When was the first social bond issued?

The first labelled social bond was issued in 2017 and by the end of 2019, total issuance volume had reached some US$40m equivalent.  The many social challenges thrown up by the pandemic have resulted in a dramatic increase in focus on social bonds, in particular  transactions to fund projects to mitigate the effects of the virus, labelled as “Covid Response Bonds”.

What are the challenges?

The difficulties are acknowledged of devising “science based” social targets to mirror the kind of emissions targets that underpin environmental impact reporting. Impacts from social projects, such as education, health, or housing, are linked in complex ways, and are challenging – and expensive – to measure at a granular level.

How are these challenges being combated?

Work has started in this area already, with policy makers, investors, credit rating agencies and extra financial rating agencies all working hard to develop more robust methodologies for understanding and measuring social risks and impacts, so these can be incorporated into investment decisions.

What are Sustainability Bonds?

The sustainable capital markets continue to evolve in other areas, notably Sustainability Bonds, where proceeds are allocated to projects, assets and activities with environmental and social themes.

What are Sustainability Linked Bonds?

A second development relates to so-called “Sustainability Linked Bonds”, where a corporate level sustainability goal, such as cutting greenhouse gas emissions, is underpinned by some kind of incentive payment to the investor.

What are the benefits of both Sustainability Bonds and Sustainability Linked Bonds?

Both are available to a much broader range of issuers than green bonds.  This has focussed attention on the quality of the environmental, social and governance criteria according to which companies are assessed, which is currently highly uncorrelated between different providers. An increasing focus on sustainability criteria among asset owners and asset managers is encouraging, as is the focus on the quality of the assessments.  It is clear that claims of social and environmental benefits, including those made by service providers, will be subject to a great deal more scrutiny in the coming months.