A Quick Introduction to the Green, Social & Sustainable Bond Market


What are impact bonds?

Impact bonds use proceeds from the bond sale to fund specific thematic objectives. Different types include use-of-proceeds bonds, pure-play bonds and payments-by-results bonds.

The lion’s share of the market are use-of-proceeds bond structures where the proceeds of the bond sale are set aside for specific purposes, and then monitored and reported. This structure allows issuers that have a range of projects or operations to raise capital to expand their green or social projects. 

Pure-play bonds remain a small part of the impact bond market. AIM defines these as bonds issued by entities that generate over 95% of their revenues from green or social assets. There is debate in the market on the extent to which pure-play bonds are required to follow the same transparency and reporting disclosures as use-of-proceeds bonds. 

The third type are payments-by-results also known as a “social impact bond”, a misnomer as they are not technically bond structures. Instead “social impact bonds” are a way of deferring payment for a service provision until certain outcome criteria are fulfilled. The innovative structure is becoming more popular with government, especially in the UK. These policy focused instruments are not part of the use of proceeds and pure play impact bond market covered by institutional investors, including AIM, however some institutional investors do invest in them.

What are the main thematic objectives of impact bonds?

The market is self-labelled, with labels being determined according to the impact strategy of proceeds. Common labels include “green”, “social”, and “sustainability”.

Who can issue a green, social or sustainability bond?

Any bond-issuing entity may issue impact bonds if it has sufficient projects or assets with positive environmental or social externalities to fund. Impact bonds have been issued by supranational institutions, national development banks, corporates, Real Estate Investment Trusts (REITs), and special purpose vehicles.

How big is the green bond market?

As of November 2016, over USD 174bn of green bonds have been issued (Bloomberg, 2016). Issuance is steadily growing as increasing numbers of Corporates and emerging economies enter the market.

What types of projects do green, social or sustainability bonds fund?

Funded projects mainly fall into the following high-level categories: renewable energy, resource efficiency, sustainable water, waste and pollution management, biodiversity, climate adaptation, education, health, employment and food security.

How consistent are the green, social or sustainable impacts of these bonds?

Impact bonds are labelled by the issuer, not a regulating body or external entity and thus there is flexibility for issuers to define environmental or social impacts. Within the fast-growing market, there are emerging best practice guidelines and standards, including the Green Bond Principles and the Climate Bonds Standard.