Sustainable Finance 2018

(UN Environment Finance Initiative, 2017)

This article is brought to you thanks to the strategic cooperation of The European Sting with the World Economic Forum.

Author: Enrico Lo Giudice, Research Associate, MainStreet Partners

Sustainable investment is one of the biggest trends in financial services. More and more investors are becoming aware of their power to make a positive impact while earning healthy financial returns. Green bonds are perhaps the most well-known instrument in this category: over the last two years, their issuance has grown exponentially. But there are many other “thematic bonds”, as they are known. These bonds finance projects with a social theme, from food and education to social housing and healthcare. Thematic bonds are the fastest-growing category of sustainable investment strategies. They allow investors to use a traditional financial instrument to advance socially useful causes, such as reaching the United Nations’ Sustainable Development Goals. According to the Climate Bonds Initiative, $700 billion of thematic bonds were issued in 2017. To date, more than 400 issuers have issued thematic bonds in 30 currencies from 50 countries.

What are social bonds?

Social bonds are a type of thematic bond. They finance a broad range of projects that help society, for example in the areas of basic infrastructure, financial inclusion, food security, poverty alleviation, the reduction of inequality, and the promotion of gender equality.

2017 was a pivotal year in the social bond market. Total issuance tripled to $10.5 billion, numbering 25 social bonds. This is an encouraging figure considering that so far, 41 social bonds have been issued in compliance with the Social Bond Principles 2017 published by the International Capital Market Association (ICMA).

Image: Statista

This year is seeing even stronger growth. Social Bond issuance reached $2.3 billion in the first quarter of 2018, from $1 billion during the same period in 2017. Among the highlights was Danone’s first social bond. The global food company’s issue has a 7-year maturity and a 1.00% coupon. It raised 300 million euros and attracted orders for over 700 million euros. The social bond will finance a variety of sustainable food and agriculture projects, such as providing support to farmers who avoid genetically modified crops, assisting communities affected by undernutrition, and funding micro and small businesses that promote healthy eating. Its success is an example of the transformative power of finance, and it shows how eager investors are to combine financial returns with a social purpose.

The rise of green bonds

Green bonds are still generating the highest interest among investors. In 2017, the green bond market grew by 78% compared to the previous year, reaching $156 billion. This surpassed the Climate Bond Initiative’s estimate of $130 billion for 2017. According to Environmental Finance, at a regional level, green bond issues reached $61 billion in Europe, $56 billion in North America and $25 billion in Asia.

In 2017, 32% of green bonds were issued by supranational agencies, 30% by companies, and 16% by financial institutions. Local authorities, sovereign states and international development agencies accounted for the rest. A quarter of green bonds financed renewable energy projects. Some 21% funded energy efficiency projects, 14% sustainable transport and 10% pollution prevention and control.

In the first quarter of 2018, green bond issues totalled $30 billion, continuing last year’s upward trend. The largest green bonds were issued by Indonesia and Belgium. Indonesia issued its first green “sukuk”, or Islamic bond. This $1.25 billion bond with a five-year maturity and 3.75% coupon attracted significant investor demand. In February, Belgium issued a 4.5 billion euro green bond with a 15-year maturity and 1.25% coupon to fund projects from clean transport to renewable energy. This was the third sovereign issuance in Europe, after Poland and France, and it helped raise public awareness of environmental concerns.

Most corporate green bonds were issued by non-financial enterprises, especially energy and infrastructure companies such as Engie, Envision Energy, Beijing Capital Group, Prologis and Tianjin Rail Transit Group. Within the financial sector, there were two important developments: the issuance of a green bond by Mitsubishi UFJ Financial Group, and the announcement of the first green bond placed by Credit Suisse.

Towards a greener future?

The green bond market is expected to continue to thrive, growing by an estimated 30% to $200 billion this year. We also foresee strong growth for social bonds in general, as more companies are expected to follow Danone’s example – especially real estate, energy and infrastructure firms. In the social sector, several international organizations and development banks are considering issuing social bonds.

Among sovereign states, Kenya is reportedly considering issuing a $20 million Water Bond with a 15-year maturity. This could fund much-needed infrastructure projects and provide access to safe, clean running water to half of Kenya’s population. Meanwhile, Hong Kong is planning to issue the largest sovereign bond ever recorded, worth $12.8 billion. Not only are green bonds here to stay, but their success is inspiring a huge range of other thematic bonds that can help us finance a greener, cleaner and fairer future.