What are sustainable bonds?

Bonds provide one way for companies to procure loan capital. The bearers of bonds become creditors of the corporation. The volume share of the global market accounted for by sustainable bonds has increased markedly since 2013, doubling or even tripling every two years to reach a sum of US$ 530 billion by 2020. Klaus Distler, Head of Corporate Debt Capital Markets at Helaba, offers a simple explanation for the growing popularity of sustainable bonds: "This type of instrument lends itself very well to financing projects with a significant sustainability element. It enables the issuer to send a clear signal about its commitment to sustainability and it gives creditors a way to invest strategically in sustainable projects."
The major agencies rate the bonds according to strict criteria to ensure credibility is maintained. Sustainable bonds can be a particularly attractive option for companies with big plans requiring substantial liquidity, such as utilities wishing to make large-scale investments in renewable energy.
Not only is the sustainable bonds market growing fast, but it is also becoming noticeably more diverse. Green bonds – bonds whose main feature is an environmental element – dominated up until 2016. The share of the market accounted for by social bonds then began to expand significantly in 2017 before jumping from US$ 18 billion to US$ 148 billion in 2020. The volume of sustainability bonds, which take in all aspects of sustainability, rose in this one year from US$ 38 billion to US$ 69 billion. Klaus Distler expects to see continued growth in social bonds in particular, "Not least because the pandemic is going to be a driver for new bonds."
Sustainability-linked bonds, a relatively recent addition to the market that are concerned with the realisation of positive overall effects (such as reduced CO2 emissions, for example) rather than the financing of specific sustainable projects, have the potential to fuel further growth in this area. This type of bond fits in very well with a comprehensive sustainability strategy, leading experts to predict it will soon become established as a fourth main pillar in the bond market. Combinations of green bonds and sustainability-linked bonds have now begun to appear as well.

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