Environmental, social and governance (ESG) considerations have leapt to the top of the list of investors' priorities. There is a huge drive towards green, social and sustainable finance and impact investment which has been spearheaded by pressure from European investors. The introduction of the Stewardship Code which was launched in October 2019 required pension trustees and asset managers to consider ESG factors across all asset classes when making investment decisions. Green and sustainable financial products have also proven to be resilient in the financial markets. As a result, interest in finance products linked to ESG metrics has exploded with a huge market catering to voracious funder demand. S&P Global has estimated that the sustainable bond market will reach $1.5 trillion in 2022 with sustainability linked bonds the fastest growing segment of the market.
There are a variety of ESG financial instruments available but the main types used in the financial markets are:
Blue bonds – these are sovereign bonds where the proceeds of the issuance must be used to finance marine and ocean based projects or to safeguard the blue economy. Blue bonds are aimed at protecting the marine environment.
Green loans/bonds – to be entered into in accordance with the LMA Green Loan Principles or the ICMA Green Bond Principles. Proceeds from a green loan or green bond issue have to be used for a purpose which has environmental benefits. Examples of projects which could be funded with a green loan or green bond include retro-fit works, funding/installing alternative sources of heat, reducing pollution, funding biomass or renewable energy projects etc.
Social Loans/Bonds – to be entered into in accordance with the LMA Social Loan Principles or the ICMA Social Bond Principles. Proceeds from a social loan or social bond must be used for a Social Project. Social Projects aim to address a specific social issue and achieve a positive outcome. Examples of Social Projects include funding affordable housing, employment generation, infrastructure funding and improving access to essential services.
Sustainability Linked Loans/Bonds – to be entered into in accordance with the LMA Sustainability Linked Loan Principles or the ICMA Sustainability Linked Bond Principles. Proceeds from the sustainability linked loan or bond can be used for any purpose but the margin/coupon under the loan or bond will step down if certain agreed ESG metrics are met on an annual basis. Conversely if the metrics are not met the margin/coupon will increase.
Climate Bonds - these are fixed income instruments linked to climate change solutions intended for projects which may have difficulty fitting within the purview of green bonds.
Gender Bonds - these have been around since 2013 and are intended to promote gender equality.
Our two specialist teams in green, social and sustainable finance, and impact investment and blended finance have the expertise to assist you with your ESG linked financing needs. Our expertise in this area is unparalleled. We were doing green loans and green bonds long before the financial markets focused its attentions on ESG. Recently, we sat on the working group for the LMA Sustainability Linked Loans Principles for Real Estate. We sponsored and helped to craft the Sustainability Reporting Standard for UK Social Housing. We also sponsored The Good Economy's joint project with Big Society Capital looking at measuring impact investment aimed at institutional investors in the real estate space.
With our extensive expertise in green, social and sustainable finance and impact investment and blended finance we can guide you towards the best ESG financial instruments to suit your needs. We can work with you to craft your ESG strategy and help you choose the best ESG metrics for your business. With our expertise in ESG linked loans including sustainability linked loans and green/social/sustainable capital markets instruments we can ensure that your fundraising goes smoothly.