Green vs Sustainability-Linked Bonds — LindaVRogers (2024)

Green BondsSustainability Linked BondsImpact BondsEuropean Central Bank

Written By Linda Rogers

Europe continues to lead the world in the issuance of sustainable bonds.

The European Central Bank(ECB) made headlines when they committed to buying sustainability-linked corporate bonds as part of their quantitative-easing program and to accept them as collateral for loans to commercial banks. Around the same time, the European Commission committed to funding 30% in covid stimulus with green bonds. This will cause the green bond market, which was already exploding without much help from the U.S. government and regulators, to double in size.

Green bonds are similar to traditional bonds in structure.

With a green bond, the issuer is committing to use the bond proceeds for green projects or to refinance eligible green assets. Here are some examples:

  • Apple issued the 2017 Green Bond to finance its transition towards renewable energy, build green buildings and improve water efficiency in their operations. For example, some of the bond proceeds were used to install solar rooftop systems to reduce emissions from their Japanese operations.

  • The city and county of San Francisco issued a bond to fund a hydroelectric facility, solar and wind projects, and energy-efficient streetlights.

  • Pepsi issued a bond to invest in eco-friendly plastics, sustainable packaging, and cleaner transportation.

Sustainability-linked bonds have a unique structure.

With sustainability-linked bonds (SLBs), the coupon rate, or interest payment, is linked to pre-determined environmental, social, and governance (ESG) targets. The issuer can use the bond proceeds for whatever they want, unlike a green bond which must be used for a specified green project. If the issuer fails to meet their target, they have to pay a higher rate to investors. The first SLB was issued in 2019 so they are brand new, but expect to hear more about them in the future. Here are examples of SLBs:

Green vs Sustainability-Linked Bonds — LindaVRogers (1)

  • Novartis issued $2.2B in SLBs. The target is to increase patients’ access to treatment for malaria and other illnesses in certain countries by 2025. “If an external verifier determines that Novartis failed to meet those targets by the 2025 deadline, then the coupon rate on the bonds, which is set at zero, will increase to 0.25% for the following three annual coupon payments until the bond matures in September 2028.” (Source: WSJ)

  • Enel issued $4.4B in SLBs. The first SLB ever issued, Enel needs to prove that it is generating 55% of its energy capacity with renewable sources by the end of 2021 or the interest due to investors will increase by 25 basis points annually. (Source: WSJ)

  • Chanel issued €600m in SLBs. If Chanel does not meet the targets, they agreed to pay an additional 75 basis points to investors when a 2031 bond comes due. The pre-determined targets are:

    • Decreasing CHANEL's own absolute emissions by 50% by 2030 (from a 2018 base year)

    • Decreasing CHANEL's supply chain absolute greenhouse gas emissions by 10% by 2030 (from a 2018 base year)

    • Shifting to 100% renewable electricity in CHANEL operations by 2025. (source: BNP Paribas)

Green Bonds versus SLBs

  • Both green bonds and SLBs are appealing to entities looking to raise capital for projects because they attract a wider pool of investors than traditional bonds alone.

  • SLBs are more results-based. For example, rather than committing that proceeds will be used to install solar panels, an SLB target of cutting emissions in half will require a review of a company’s entire operations. Bond proceeds could be used to install solar panels, but the company is not tied to that specifically if another opportunity or project arises that is more effective at reducing emissions.

  • SLBs tend to experience lower staffing and administrative costs than green bonds. Issuers of green bonds have to spend time and money isolating green projects in order to prove how the bond proceeds were used.

  • Both green bonds and SLBs need standards in place to ensure there is no “greenwashing”. Greenwashing is when issuers use the "green" label even though the bond proceeds are used for unsubstantiated or misleading environmental benefits.

The future likely includes both green bonds and SLBs. Not every company has a singular, expensive green project that justifies the issuance of a green bond. A more general-use SLB with a target to aggressively reduce emissions may be a better fit for companies that have multiple green projects and require flexibility with the proceeds. The market for green bonds and SLBs is still new, but with the ECB supporting both in a big way, expect to hear more about these innovative products in the future.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients nationwide and is based in San Diego. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a virtual fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.

Green BondSustainability Linked BondChanel SLBEnel SLBNovartis SLBApple Green BondPepsi Green Bond

Linda Rogers

I'm an expert in sustainable finance, particularly in the realm of Green Bonds and Sustainability Linked Bonds (SLBs). My expertise stems from an in-depth understanding of the concepts and practices within this field. I've actively followed and analyzed market trends, regulatory developments, and the implementation of sustainable financial instruments by various entities.

Now, let's delve into the key concepts mentioned in the article:

Green Bonds: Green Bonds are financial instruments where the issuer commits to using the proceeds for environmentally friendly projects or to refinance eligible green assets. In the article, examples include Apple issuing a Green Bond in 2017 to finance renewable energy projects, green buildings, and water efficiency improvements. Similarly, the city and county of San Francisco issued a Green Bond for funding hydroelectric, solar, wind projects, and energy-efficient streetlights. Pepsi also issued a Green Bond to invest in eco-friendly plastics, sustainable packaging, and cleaner transportation.

Sustainability-Linked Bonds (SLBs): SLBs have a unique structure where the coupon rate is linked to predefined environmental, social, and governance (ESG) targets. Unlike Green Bonds, the issuer has flexibility in using the bond proceeds. If the issuer fails to meet the targets, they are obligated to pay a higher rate to investors. Examples mentioned in the article include Novartis issuing SLBs to increase patients' access to treatment for malaria and other illnesses by 2025, Enel's SLBs linked to generating 55% of its energy capacity with renewable sources by the end of 2021, and Chanel's SLBs tied to reducing emissions and transitioning to renewable electricity.

European Central Bank (ECB): The European Central Bank has made headlines by committing to buying sustainability-linked corporate bonds as part of its quantitative-easing program and accepting them as collateral for loans to commercial banks. This move is significant in driving the growth of the sustainable bonds market in Europe.

Green Bond Principles (GBPs) and ICMA Guidelines: Both Green Bonds and SLBs require standards to prevent "greenwashing" – misleading environmental claims. Green Bonds adhere to the Green Bond Principles (GBPs), which mandate issuers to document the use of proceeds, provide annual updates, and appoint external reviewers. SLBs follow voluntary guidelines from the International Capital Market Association (ICMA) to ensure measurable, verifiable, and relevant targets.

The future of the market likely includes both Green Bonds and SLBs, with SLBs offering flexibility for companies with multiple green projects. The European Central Bank's support is expected to contribute significantly to the growth of these innovative financial products.

Green vs Sustainability-Linked Bonds — LindaVRogers (2024)
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