Bonds with benefits

November 9, 2020

An overview of the landscape of Impact and Sustainability bonds

Bond markets have embarked on a new era of innovation to align their funding objectives to answer the “call to fight” climate change and improve societal imbalances. Since 2014, markets have designed instruments to tackle these global challenges. From green and social to ESG-linked bonds, total issuance has reached over $315bn just in 2020 . In this article, we dive into each of these bonds to explain their key characteristics and detail their sources of impact generation.

Impact generation across fixed income markets

Impact investing is often confused with ESG investing. At Asteria IM, impact investing is clearly defined as investing in companies or projects whose services, products or technologies contribute positively to a sustainable future. ESG investing, on one hand, captures the companies’ operating Environmental, Social and Governance characteristics, i.e. behavior. This means that an energy company issuing an ESG-linked bond is improving its ESG profile, rather than promoting a sustainable future. Impact in bond investing, on the other hand, can be generated from two sources: at the project level and/or at the issuer entity. Green and social bonds generate impact at the bond-project level, whilst financing sustainable projects. Impact at the issuer level can be captured through SDG bonds and most importantly through issuers whose business activities are sustainable, at Asteria these are called Green and Social Corporates. This complementary approach allows investors to search for impact across capital structures and bond markets. However, it is critical to distinguish what it is financing.

Use of Proceeds or Issuer Entity – Why Choose? Pick Both!

In the case of project level impact, the money raised will be used to (re)finance the transition to a low-carbon economy or other sustainable objectives. Through green and social bonds, the financing is allocated directly to these impactful projects, while investors have transparency on how their money is used. In practice, an energy company issuing a green bond to finance a solar farm project is impactful at the project level. While a pure play renewable energy company issuing a normal bond is impactful given the company’s sustainable business.

Green Bonds – financing green-projects

The first green bond was issued in 2007 by the European Investment Bank. Since then the green bond market has grown significantly to reach $754bn and has become an important tool for issuers to finance the transition to a low-carbon economy and protect the climate. The adoption of the Green Bond Principles (GBP) represents the foundation for the definition of green bonds and have been adopted also for social and sustainable bonds. There are four core components:
1. the money raised is specifically used for green projects,
2. the projects are selected and evaluated with a well-defined governance structure,
3. the proceeds are managed specifically for green projects, and finally,
4. a reporting of how the money has been used is established.
The impact generated is linked to each individual green bond, meaning the same issuer can have green bonds with different impact depending on the type of projects (solar, wind, energy efficiency...).

Social Bonds - impacting communities

Social bonds follow the same four key principles as green bonds. However, in this case, instead of financing green projects, the use of proceeds is used for social benefits.
These instruments have risen in volume since the start of 2020, driven by the COVID-19 pandemic amounting to over $22bn compared to just $9bn for the same period in 2019 .
The key characteristic to define a social bond is to identify the “target population(s)” on which social issues or outcomes are targeted. Examples of population(s) target are people with disabilities, under-educated or the general public. While social projects can range from providing access to affordable housing, access to education or health care and financial inclusion.
Most recently, the European Union has announced a €100bn financing program to support member states’ short time work and health public expenditures due to the COVID-19 pandemic. The SURE program will be financed with social bonds and will target the general population. Reporting impact measures will be the number of employees/companies covered or supported.

Sustainable Bonds = Green & Social

Financing green and social projects from a single bond issue is known as a Sustainable Bond. For the first six months of 2020 a total of $28bn have been issued according to ICMA . The combination of green and social financing provides a broader impact reach for issuers. It also allows bond investors to access different sources of impact from the same bond investment. As a result, the sustainable bond will apply the same principles guiding green and social bonds. Notwithstanding the ICMA principles, green, social and sustainable bonds do not need to be verified or certified and there is no event of default if there is a breach of these principles. This means, that the investment risks are the same as traditional bonds, however, investors benefit from impact generated at the project level.

Sustainability Linked Bonds – SDG or ESG objectives

Combining the coupon rate with the achievement of certain sustainability targets, is known as a Sustainability Linked Bond (SLB). Sustainability objectives can focus on SDG or ESG targets, the issuer commits to achieve selected SDG goals or to strengthen its ESG characteristics. In addition, use of proceeds are for general corporate purposes as these sustainability objectives are set at the issuer level.
If the issuer is unable to meet its pre-specified sustainability targets, the coupon rate will increase. Step-up coupons are not a new feature in fixed income markets, however, attributing the increase to sustainability measures is unique, highlighting the increasing push from both issuers and investors to make sustainability a component of fixed income markets.
The Sustainability-Linked Bond Principles (SLBP) are based on five principles:
1. The first is to identify and select appropriate KPIs, these should be relevant and material to the overall business.
2. The selected KPI(s) have ambitious Sustainability Performance Targets (SPTs) i.e. the KPI is materially improving compared to a “business as usual” scenario.
3. These KPI and SPT are then embedded in the bond’s investment risk characteristic, in such a way, that there is a meaningful cost-incentive compared to a normal bond (such as a step up in the coupon)
4. Reporting, is recommended at least annually
5. Verification is required post-issuance for SBLP, unlike sustainable bond principles.
Sustainability Performance Targets are measurable goals that align with the issuers’ SDG commitments or ESG strategy. This means that an issuer, depending on the selected sustainability target(s), can improve its ESG profile or achieve its commitment to the SDGs.

SDG Linked Bonds – Issuer Entity Impact

Issuers are re-defining their corporate strategies around the Sustainable Development Goals. As a result, SDG Linked Bonds further incentivize issuers to formalize their sustainability strategy and link certain targets to the coupon rate. If the measures target specifically its business activities, then impact is generated at the entity issuer level.
An example of SDG Linked bond and issuer entity impact is the first SDG linked bond was issued in 2019 by Enel Spa, the leading Italian power producer. The coupon of the bond will step-up by 0.25% p.a., if the issuer does not meet its SDG 7 (affordable and clean energy) goal to reach at least 55% of renewable installed capacity by 2021.

ESG Linked Bonds – An important tool towards sustainability

As previously illustrated, ESG linked bonds fall outside of the scope of impact investing, as ESG KPIs aim to upgrade the sustainability profile of the issuer. There is no standardized definition of ESG targets, however, intensity metrics are a good starting point. Green House Gas (GHG) emission intensity is computed as the amount of GHG emitted per million of revenue generated, this metric can be understood as an efficiency measure. The higher the revenues generated with less GHG, the better is the emission efficiency of revenues. However, the business activities that generate those revenues do not necessarily contribute to a low-carbon economy.
A recent example is the bond issued by Suzano, a Brazilian pulp and paper producer, in September 2020. The coupon rate will step-up by 0.25% p.a. if the average GHG (greenhouse gas) emissions intensity of 2024 and 2025 is above 0.19 tC02e/ton.

Asteria Green and Social Corporates – Pure impact generators

There are bond issuers whose business activities positively impact the planet, meaning that their bonds are impactful at the issuer entity level. At Asteria Investment Managers, we’ve developed a proprietary impact research process that identifies these positive impact issuers, by defining sector activities that positively and negatively contribute to the planet and to the well-being of people. Most importantly, this process results in selecting only issuers that have exposure to positive activities, by avoiding “netting” of negative with positive activities, leading to a pure impact universe of bond issuers.


Evolving bond markets enable investors to capture complementary sources of impact and to diversify across bond instruments and impact issuers. While the market of green and social bonds is growing significantly, it remains a fraction of global fixed income. By diversifying into green and social corporates and seeking impact generated at the entity level, investors can access an additional source of impact investing opportunities in bond markets.

4 Support to mitigate Unemployment Risks in an Emergency
6 Suzano Sustainability-Linked Securities Framework, August 2020

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