The COVID-19 pandemic accelerated the focus on sustainability and sustainable finance is gaining ground. Sustainable debt instruments have raised financing for numerous sustainable development projects in multiple countries over the past years and are crucial in the transition to a low-carbon and more inclusive economy.
Since the pandemic hit, the social dimension has been brought to the fore, with a steep uptick in social bond issuances as a result. Given the new sense of urgency in addressing climate change and societal issues, the strong growth in green, social, sustainability and sustainability-linked bonds is likely to continue.
With the evolving European initiatives and regulatory framework on sustainable finance, including the upcoming EU Green Bond Standard (EU GBS), Europe is in the driving seat of sustainable finance worldwide. Leading international standards for green, social, sustainability and sustainability-linked bonds recommend that issuers of such bonds undergo an external review of their bond framework and their allocation report. The draft EU GBS proposes to make the pre- and post-issuance external review mandatory, and furthermore introduces the idea of a market-based registration scheme for external verifiers.
As we have just entered the “make or break decade for climate action”, as stated by European Commission President Ursula von der Leyen, we need to make finance part of the solution to our global challenges and contribute to making finance sustainable by default.
Green Bonds
The European Commission has defined EU Green Bonds (“EU GBS”) as any type of listed or unlisted bond or capital market debt instrument whose proceeds shall be exclusively used to finance or refinance in part or in full new and/or existing green projects meeting environmentally objectives as defined in the EU Taxonomy.
The International Capital Market Association, the Climate Bonds Initiative, the World Bank and the European Investment Bank have their own definitions, but a common aspect embedded into these, is how the use of bond proceeds are to be allocated, i.e. towards projects that bring environmental and climate benefits.
Social and Sustainability Bonds
The basic idea around Green Bonds is being applied to other areas and has set a blueprint for the launch of Social Bonds, Sustainability Bonds, Blue Bonds and other Thematic Bonds that raise financing dedicated to a specific social development purpose, might it be a social project, a sea protection or yet another type of sustainability-related project.
Social Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible social projects and which are aligned with the four core components of the Social Bond Principles. Different types of Social Bonds exist in the market.
Sustainability Bonds are bonds where the proceeds will be exclusively applied to finance or re-finance a combination of both green and social projects. Sustainability Bonds are aligned with the four core components of both the Green Bond Principles and Social Bond Principles with the former being especially relevant to underlying green projects and the latter to underlying social projects.
Sustainability-Linked Bonds
Sustainability-Linked Bonds are any type of bond instrument for which the financial and/or structural characteristics (typically their interest coupon) can vary depending on whether the issuer achieves predefined Sustainability/ESG objectives. In that sense, issuers are thereby committing explicitly to future improvements in sustainability outcome(s) within a predefined timeline.
A glance at the market
Since the issuance of the first Green Bonds by the EIB in 2007, swiftly followed by the ones issued by the World Bank in 2008, the market has grown, every year, at an incredible speed.
Luxembourg at the forefront of Sustainable Finance
Luxembourg has always been at the forefront of sustainable finance and has played a pivotal role when it comes to Green Bonds and lately also to social, sustainability and sustainability-linked bonds. Launched in 2016, the Luxembourg Green Exchange (LGX) is the world’s first and leading platform dedicated exclusively to sustainable financial instruments.
