Sustainability bonds are a type of green bond where the proceeds from the issuance are applied to financing or refinancing both green and social projects. For example, a social project may have environmental co-benefits and thus can be classified as a sustainability bond at the determination of the issuer. They should follow the Sustainability Bond Guidelines, which are aligned with the Green Bond Principles and Social Bond Principles. These use-of-proceeds bonds can be issued by companies, governments, and municipalities for assets and projects.
Sustainability bonds are becoming increasingly popular among issuers/borrowers, as they allow for greater flexibility regarding which project categories to include.
Current or potential adaptation-relevant sector applications:
- crop and food production – including agroforestry; livestock production; fisheries (marine, freshwater, and aquaculture); irrigation;
- ecological services and management – forest management (including afforestation and reforestation); wetlands; ecosystem and biodiversity protection, conservation, and enhancement;
- water supply (infrastructure) – water storage; water harvesting; water management;
- coastal and riverine protection and management – coastal defences or flood protection barriers; river flood protection measures;
- disaster risk reduction – early warning and observation systems;
- energy infrastructure – energy generation (including renewables);
- transport infrastructure;
- other built environment and infrastructure – urban development;
- social infrastructure – education; health facilities; and
- industry and manufacturing.
Additional insights:
- This is an emerging instrument: the first sustainability bond was issued in 2014 by Unilever.
- In 2021, corporations and development banks were the main issuers of sustainability bonds (44% and 36% of total 2021 issuances, respectively) (OECD, 2023).
Considerations for issuing sustainability bonds:
- Bond proceeds need a robust pipeline of green and/or social projects to fund.
- Bonds need to identify specific target populations for social projects.
- Bonds are not appropriate for all borrowers/issuers, especially in countries that may not be able to take on additional debt.
- Guarantees may be needed to increase investors’ confidence in bonds issued in developing countries.
Adapted from the following sources:
International Capital Market Association. (2021, June). Sustainability bond guidelines. https://www.icmagroup.org/assets/documents/Sustainable-finance/2021-updates/Sustainability-Bond-Guidelines-June-2021-140621.pdf
Organisation for Economic Co-operation and Development. (2023). Report on green, social, and sustainability bonds issued by multilateral development banks (DAF/CMF/AS(2023)3/REV2). https://one.oecd.org/document/DAF/CMF/AS(2023)3/REV2/en/pdf#:~:text=The%20sustainable%20bonds%20market%20grew,trillion%20of%20issuance%20to%20date.