Need to finance the transition to a sustainable economy
To finance a sustainable future, we need significant investments to achieve the Sustainable Development Goals. The SDG financing gap was estimated at ca. USD 2.5 trillion annually before the coronavirus pandemic. Given the global spread of COVID-19, the SDG unmet financing needs could even increase by 70%.
Sustainable bonds offer an opportunity to fixed-income investors for investing in a sustainable future. A bond is like a loan that you give to a government or a company. The difference is that the debt can be traded. As a bond investor, you will get a coupon, which is an interest payment. The interest rate will be paid by the issuer of the bond and can vary depending on markets, risks, and duration. In the case of a sustainable bond, the use of proceeds – that is, how the firm, government, or organization intends to utilize the money raised from investors – should be solely committed to projects with positive environmental and social outcomes.
Sustainable bonds contribute to achieving the SDGs
The risk profile of sustainable bonds is identical to that of conventional bonds from the same issuer, as is the structure. The main difference is that the issuer, when emitting a sustainable bond, commits itself to use the money for projects with environmental and social benefits. Projects financed through sustainable bonds can include for example the access to safe and affordable clean water combined with pollution prevention or energy smart technologies combined with access to essential services such as affordable housing.
Thus, investing in sustainable bonds ensures that all your money will be used to finance green and social projects, contributing to reaching one or several of the 17 SDGs of the UN Agenda 2030. For example, investments in sustainable water management can also contribute to aquatic biodiversity conservation as well as to access to essential services and food security. In this example, the projects financed through the emission of a sustainable bond directly contributes to achieving SDG 6 “Clean water and sanitation” and SDG 2 “Zero hunger”.
While there is yet no legally binding definition what sustainable bonds are, some principles and guidelines have been established such as the Sustainability Bond Principles of the International Capital Market Association (ICMA).
How radicant selects green bonds
The sustainable bonds market has been booming for some years. To guarantee that we invest solely in sustainable bonds funding projects that truly contribute to the achievement of the SDGs, we invest exclusively in sustainable bonds classified as “Sustainability” on the ICMA database. The Sustainability Bond Principles recommend that issuers report on the use of proceeds and more and more issuers follow these guidelines.
In addition, many issuers obtain a second opinion for their sustainable bonds from research agencies such as ISS ESG, Sustainalytics or Vigeo Eiris.