Nishant Malhotra Founder of Middle Road OPC Pvt Ltd & The middle Road platform on the evolving Sustainable Finance sector

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What are Sustainable Bonds in a nutshell?

Source:, Sustainable Bonds: Market Forecast 2019. Source: CBI, DZ Bank (2019)

To achieve its 2020 agenda, the United Nations needs to attract $5T private capital per year. The global bond market valued at $100T will play one of the most pivotal roles in achieving the Sustainable Development Goals target as part of Public Private partnership. Although the bond market is one of the essential ways to attract capital for development work through the Sustainable Bonds, it is still less than $1T. At the same time, in recent years, a surge in enabling Environmental, Social, and Governance standards within the gamut of impact investments has boosted a rise in issuance of sustainable bonds within this segment. A rise in awareness on social and environment issues and its impact on wellbeing has led to an increased emphasis on both development of economic and social good. Globally, new indices and frameworks are being developed. Example SEDA.

Green, Blue, Social, ESG, Sustainability, and Sustainable Development Goal bonds and Thematic bonds are derivative of this theme, investing and implementing social and environmental good outcomes and collectively termed as Sustainable Bonds. Among them, Green bonds are the oldest more than a decade long, having roughly $500B of issuance.

African Development Bank issued the largest single social bond of $1.468B in 2018

Multilateral development banks like International Finance Corporation, a member of the World Bank, and European Investment Bank are key players apart from Agencies Fannie Mae, which is the world’s leading issuer of green mortgage-backed securities (MBS). The US, Canada, China, and a few European countries incl. France, Germany, Spain, Ireland and the Netherlands are major drivers of these bonds. India is one of the few developing countries showing increased promise in this segment. 

# Overview of Global Bond Market

So, what are Green, Blue, Social, and Sustainable Bonds? To delve further into sustainable bonds, it’s essential to have a global perspective of capital markets.

Global Capital Markets, both debt and equity, play a fundamental role in funding economic activity, especially in well-developed markets — for example, in the US, 67% of the funding economic activity. Sadly, until recently, the prime importance of economic growth has been growth in shareholder value. The rise in awakening to the significance of wellbeing, along with monetary growth, has embedded the importance of positive social and environmental impact within the business ecosystem. Backed by an increase in social activism, empirical evidence-based research, civic societies, corporate social responsibility, and awareness due to proliferation of the internet, sustainable investing is emerging as a sunrise sector to address long-pressing issues like inequalities within the global ecosystem. 

In the US, the debt capital markets provide 80% of the financing compared to bank loans, which dominate less developed markets. Well-Regulated and functioning capital markets i.e., primary and secondary markets, are the most critical enablers for catalyzing a sustainable economic and social impact. Primary markets facilitate secondary markets through a deep network of market makers. Market Makers add liquidity into the system by both buying and selling securities, including during times of distress. Market makers drive the buy and sell the spread of securities and move credit within the system. During the credit crises, the LIBOR, the benchmark used to gauge short term lending between banks shot, up undermining loans leading to a credit freeze.

A comprehensive list of securities drives liquidity within the system, laying down mechanisms for managing market and credit risk effectively. Secularization enables assets to become tradeable through the marvels of financial engineering, driving consumer loans, and alleviating interest rates. At the same time, it makes managing risk more difficult by distributing risk through securitization. Securitization, began in the US during the 70’s to promote consumer lending almost culminated in bringing down the global financial system in 2008. Lately, securitization is making a sustainable impact through green mortgage-backed securities. Fannie Mae is the world’s largest issuer of these securities targeting affordable housing and energy efficiency as critical themes within this sector. 

# What are Green, Blue, Social and Sustainability Bonds in a nutshell?

European Investment Bank issued the world’s first Green Bond, called a Climate Awareness Bond (CAB) in 2007. It remains the largest issuer of Green Bonds with over € 23.5B raised across 11 currencies.

Green bonds, which are the oldest of the sustainable bonds, have raised $500B in the capital so far with a target of $1T by 2020. Green bonds prime target projects in climate mitigation involved in the reduction of carbon footprints, and climate adaption (increase adoption of renewable energy) ( SDG 133). Both these themes help in aligning to the Paris agreement of keeping global warming less than 2 Other themes include clean water and sanitation (SDG6), affordable and clean energy (SDG7), buildings and transport (SDG9), city infrastructure (SDG11) and agriculture (SDG15). e-mobility is increasingly becoming a defining theme within the Green bonds.

The figure to the left highlights uses of Green Bonds proceeds until June 2018. Clean energy remains the largest sector followed by low carbon buildings and transport. Sustainable industry, innovation and infrastructure remains the next key SDG goal addressed by green bonds. As green bond market develops, more thematic bonds overlapping various SDGs play a larger role in development sector.  Although green bonds include fishery, The World Bank assisted the Republic of Seychelles to launch the first $15 M bond through a private placement mode. Source: Climate Bond Initiative June 2018

Blue Bonds are a subset of green bonds focused on the sustainability of the marine ecosystem. Blue bonds are very similar to green bonds and focused on SDG 14. Blue Bonds raise capital for the implementation of sustainable development goals related to life underwater or for reinforcing sustainable blue economy for a well-developed blue capital as its core.

ChildFund India and Grameen Impact Investments India launched the Women Holistic Empowerment and Enhanced Livelihood (WHEEL) impact bond –the world’s first domestically funded sustainable development goals bond (SDG bond) in 2008.

Social Bonds enable, develop, and implement new and existing projects with a positive social outcome. Backed by Social Bond Principles to make the process transparent and more accountable, the proceeds target population with disadvantages including disabilities, marginalized communities, under-educated, etc. for specific. Sustainable Development Bonds fall under this category. Launched in 2014, Social Bonds have grown 28 times until 2018 thanks to the development of Social Bond Principles, a global framework for issuing bonds.1

Sustainable Bonds/ ESG/SGD Bonds  work on the core mandate of implementing both positive social and environmental impact. They include the best of both the world’s i.e. green and social bonds. These bonds mitigate a negative social impact of green bonds and vice versa.

A detailed look at these bonds will be published under Publication section on this platform.