We are currently experiencing a cultural change in the investor decision-making process. It is no longer just focusing on financial returns, but also looking to address sustainability-related risks. Thus, incorporation of Environmental, Social and Governance (ESG) aspects can ensure long-lasting access to capital.
What is sustainable investment?
Sustainable investment directs capital to companies and projects that are not only financially attractive, but furthermore offer a distinctive sustainability benefit to stakeholders. Those types of investments are becoming increasingly popular, especially among risk-averse investor groups such as pension funds, insurance companies, governments, or the private sector.
Green, Social and Sustainability Bonds
In order to communicate sustainable investment choices to stakeholders, organisations may choose to issue a sustainability-labeled bond such as Green Bond: Any type of bond instrument, where the proceeds are used to finance or refinance new or existing projects, that offer a green benefit, such as the provision of renewable energy. Social Bond: Any type of bond instrument, where the proceeds are used to finance or refinance new or existing projects, that offer a social benefit, such as provision of basic infrastructure, e.g. clean drinking water. Sustainability Bond: Any type of bond instrument, where the proceeds are used to finance or refinance new or existing projects, that offer both a green and social benefit to its stakeholders.
Benefits of sustainable bonds
Sustainable bonds may offer a variety of benefits to both issuers and investors
• Attracting of new investors, that focus on sustainability aspects in decision-making
• Support of an issuer’s ESG objectives
• Compliance/Contribution to emerging legislation or guidelines, such as Agenda 2030 or Nationally Determined Contributions (NDCs)
• Frequent oversubscriptions of issuances
• Sustainable bonds match performance of vanilla bonds
• Support of an investor’s ESG objectives
• Long-term investment opportunities
• De-risking of investments
Process of Bond issuance
- Business Case - Review of Financing objectives and Options and Appointment of an Underwriter
- Bond Framework - Issuer creates Internat Green/Social Bond Framework based on the Core Components of the Green/ Social Bond Principles by the Internation Capital Markets Association (ICMA)
- Second Party Opinion (SPO) - SPO on the internal Green/ Social Bond Framework regarding compliance with the GBP/ SBP Core Components
- Bond Issuance Preparation - Setting up of bond Details according to the bond Framework, Marketing and Registration of the bond issue
- Pre-issuance verification - Verification of bond Details regarding compliance with the respective bond Framework
- Launch Phase - announcement of issue, book Building, pricing and conducting of the Transaction
- Use of Proceeds - Allocation of proceeds to eligible Projects based on bond Framework
- Post-Issuance external review - Verification of ongoing eligibility of Projects and management of proceeds
- Bond repayment - At the date of maturity, the debt will cease and the borrower will redeem the issue by paying the face value, or principal
External review options
During the bond issuance process, TÜV NORD offers a variety of external reviews to ensure a smooth issuance process and credibility to investors
a) Second Party Opinion: Alignment of the bond framework with ICMA’s Social and/or Green Bond Principles and their respective core components:
• Use of Proceeds
• Process for Project Evaluation and Selection
• Management of Proceeds
b) Pre-issuance verification: Verification that the bond to be issued aligns with the structure and systems defined within the respective bond framework
c) Post-issuance verification: Ongoing compliance of the bond with its framework regarding allocation of proceeds to eligible projects and reporting requirements
d) Pre- and Post-Issuance Certification against the Climate Bonds Standard: TÜV NORD is an accredited verifier for the Climate Bonds Initiative. We are one of a handful of verifiers who can act globally and across all Taxonomy classes.