Corporate sustainability bonds as new instruments for corporate debt financing

June 8, 2023
The ESG App
Since the early 2010s, corporations have increasingly leveraged bonds as a financial tool to fund various sustainability projects. The funding raised from these bonds are earmarked for environmental and climate-friendly projects, such as renewable energy, sustainable infrastructure, resource conservation, or linked to some environmental objectives.

Since the early 2010s, corporations have increasingly leveraged bonds as a financial tool to fund various sustainability projects. The funding raised from these bonds are earmarked for environmental and climate-friendly projects, such as renewable energy, sustainable infrastructure, resource conservation, or linked to some sustainability objectives. The total green, social and sustainability (GSS+) bonds issued by corporations, governments, and various institutions increased from about $5 billion in 2013 to a peak of over $1 trillion in 2021. According to the latest data from ICMA’s Sustainability Bonds Database, corporate-issued bonds account for 16% of the number of GSS+ bonds. They are about 24% of the total value ($840 billion across all years).

Green bonds account for most (close to 70%) of the bonds issued by corporations and this proportion is slightly higher than the share of green bonds across all issuers. Across other bond types, corporations issued more sustainability-linked bonds and fewer bonds with social objectives (source: Sustainability Bonds Database, ICMA)

Sustainability-linked bonds (SLBs) are a relatively new addition to the financial toolkit. They are structured based on whether the issuer achieves some sustainability or ESG metrics within a given timeframe. If the issuers do not meet the pre-defined goals, they must pay a penalty such as a higher interest rate. The funding, however, is not earmarked for any particular purpose and can be used to fund any company initiatives. SLBs are more agile since they are usually not tied to large capital-intensive projects, and these features have made SLBs attractive for companies in diverse sectors. About half of the issuers for SLBs have KPIs tied to an environmental metric, while another 46% have KPIs tied to multiple themes (e.g., an environmental metric and a social metric). Many multinational companies have issued SLBs, including well-known ones such as Carrefour, Natura Cosmetics, Coca-cola, L’Oreal, H&M, Pandora, Novartis, and Sanofi. One or more specific metrics, such as the number of patients who receive access to some treatments or the share of recycled materials in total materials used in commercial goods, are linked to the bond characteristics.

Social bonds are “use-of-proceed” bonds earmarked for projects with a social objective. An example of a social bond in the United States is the Fannie Mae multifamily social bonds, which have social objectives to build affordable multifamily housing, retrofit multifamily units as green buildings, and generate utility cost-savings. Few multinational corporations have issued social bonds, with Danone as one of the first examples. In 2018, Danone issued a €300 million bond to finance projects purposed to promote positive social impact, such as research on nutrition, social inclusiveness, responsible farming, etc. The bond has a maturity of 7 years and is due in March 2025.

Green, social, and sustainability (GSS+) bonds are financial instruments that provide additional sources of funding for projects with pre-determined ESG objectives. Many companies may tap into this additional source of finance to support their environmental or social transition if the governance and transparency frameworks are in place. While the design and validation of the ESG objectives of bonds may require additional evaluation and perhaps more rigour, these instruments create more financial flexibility for companies making an effort to advance their sustainability goals.

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