Sustainable Finance Boosted by New Rules on ESG-Linked Bonds

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ESG-linked bond issuance has soared to more than $200 billion since being first introduced in 2017. Now, you will be hard-pressed to find bond investors without an explicit ESG-mandate. Overbond’s issuer analytics monitors the green bond market, quantifying green bond premiums, measuring green bond issuance options in different currencies and identifying green bond investor holding patterns.

Source: Bloomberg Green

Guidelines released Tuesday are set to encourage more borrowers to issue bonds tied to general environmental targets, rather than specific projects, following massive growth of similar deals in the loan market.

The International Capital Market Association has published principles for sustainability-linked bonds, offering guidance for issuers that want to raise environmentally friendly debt with terms tied to specific ESG goals. Issuance of similar loans has soared to more than $200 billion since first introduced in 2017, data compiled by Bloomberg show.

“It’s a completely new instrument with general use of proceeds that complements nicely the other instruments,” said Lars Eibeholm, head of treasury and sustainability at Nordic Investment Bank, and chair of ICMA’s green and social bond principles executive committees.

The guidelines are voluntary but similar rules for green and social bonds have been embraced by borrowers and investors, keen to get consensus in a fast-evolving market. Those guidelines have also helped borrowers that might be worried about being accused of ‘green washing,’ the practice of putting spin over substance.

A lack of agreed-upon rules has been one of two main barriers preventing greater issuance of sustainability-linked bonds, said Farnam Bidgoli, head of sustainable bonds in EMEA at HSBC Holdings Plc. The other obstacle is that bonds with step-up coupons aren’t eligible for purchase by the European Central Bank, she said.

“Issuers were put off sustainability-linked bonds by the amount of market sounding they’d need to do before selling a deal,” Bidgoli said. Now there’s greater clarity, there are deals in the pipeline likely to be brought to the market in the coming months, she said.

Borrowers that will be attracted to the sustainability-linked bond structure may include consumer goods companies such as food and beverage firms as these typically don’t have many large capital projects that can be matched with green bond issuance.

World First

Italian utility Enel SpA sold the world’s first ESG-linked bonds last year, featuring coupons that go up if the company misses environmental targets. Other borrowers have been slow to follow the company’s lead, though some have indicated they want to.

The adoption of ESG pricing creates a financial incentive for companies to follow through on environment plans. And though the financial impact of missing targets may be small, such deals are important in terms of reputation and credit quality, Telefonica Deutschland Holding AG’s director of corporate finance said earlier this year.

ICMA doesn’t have a forecast for the sustainability-linked bond issuance but “large corporates are looking at this with great interest,” said Nicholas Pfaff, managing director and head of sustainable finance at ICMA.

The capital markets body also updated its guidelines on social bonds, reflecting the big increase in issuance of these securities following the Covid-19 pandemic.