Since the Paris agreement of 2015, ESG Bonds (Environmental, Social and Governance bonds) became increasingly important as a financial instrument and used to finance sustainable projects throughout the world. As most of the current industries need to reshape or re-engineer their production processes to meet the SDG's goals, it offers opportunities for investors to diversify their portfolio in a wide range of areas such as Energy, Agriculture, Water treatment... However, all countries do not define ESG the same way as it often leads to investing in projects that meet the sustainable criteria of the country but not the UNs...
ESG bonds is an umbrella term that encompasses environmental/social projects funding, including green bonds or social bonds, and also target-based structures, such as sustainability-linked bonds (SLBs) that incentivize the issuing company to achieve higher ESG standards across the board. These bonds are increasingly important in financial markets as companies seek to increase their sustainability credentials through a focus on renewable energy, pollution reduction, or climate change adaptations and initiatives. Companies issuing these bonds are not only addressing their role as corporate citizens but are also attracting new waves of socially-minded investors that are supportive of ESG initiatives. Since the Paris agreement of 2015, investors, companies, the general public and certain government push to incorporate ESGs into corporate operations or investments portfolio.
Future projects financed with ESG bonds
Since 2015, a number of projects have been funded through ESG's, namely:
EDF, one of Europe's leading energy services have issued nearly $7Bn in green bonds for renewable energy projects such as windmill parks, biomass and/or geothermal.
Apple spent $4.7Bn to fund a mega solar farm in Nevada is the 17th ESG bond they financed in the world.
ReNew power issuing nearly $585 million to fund its solar farm in India.
According to the world bank, nearly $157Bn worth of ESG bunds has been issued in 2019.
Future projects financed with ESG bonds:
Italy raised $9Bn in its first-ever green bond issue
UK plans on issuing nearly $40-$45Bn of green bonds over the next years
In 2021, it is expected that governments will issue $500Bn of ESG bonds
President Biden and the FED plans on issuing $1 Trillion of ESG bonds over the next decade
The greenwashing problem
As precise in the introduction, ESGs bonds are an opportunity for investors to yield considerable revenues whilst funding a sustainable project. However, it largely depends on the definition countries have of sustainability or the definition they want to give. Despite its rise over the last decade, some countries often use that to "greenwash" their projects, i.e. making it look like a green project when it's not.
Recent examples include Chinese companies investing in a more energy-efficient coal plant but labelling it as a green bond, the state of Queensland issuing bonds to protect the coral reefs but increasing their investments in coal projects or Nike investing in green bonds but dealing in the same time in child labour scandals within its supply chain.
On the other hand, some projects seem green but have substantial evidence to have long-term environmental problems. One of the most recent examples is Hydrogen, which is deemed one of the potential green replacements for oil and attracts investment from banks and/or hedge funds. Even if its usage does not have substantial carbon emissions, the initial production phases do.
ESG bonds can become one of the solutions for sustainability transitions in countries. It offers an opportunity for every stakeholder as investors can yield substantial revenues from fixed income, companies can easily fund their projects and, the general public can benefit from it as it can decrease air pollution as well as creating jobs.
On the flip side, organizations such as the World Bank, the IMF or countries have to agree on a common definition of what constitutes a green project or a social project for it to be effective worldwide. Besides, the increased usage of ESG scores from financial institutions such as JP Morgan, Goldman Sachs and others can become a good indicator of the long-term performance of a particular company if and only if there is a unique definition.
Article written by SEPEC CONSULTS SAS