• Institute for Sustainable Investing

Bond Markets Are Embracing Social and Environmental Impact

Tapping into a growing sustainable investor base is just one of the advantages that companies might reap from issuing green, social and sustainability bonds.

Two years ago, few investors would have predicted that a social initiative, such as supporting ethical farming or gender equality in the workplace, could be financed via a bond. Today companies are looking beyond environmental impact to advance broader sustainability strategies through bond issues. They’re using them to send important signals to investors, according to the Morgan Stanley Institute for Sustainable Investing’s  latest report, “Sustainable Value: Sustainable Bond Issuance as an Investor Signal."

Sustainable bonds can be a valuable tool for issuers to communicate their priorities to investors.

“In 2017, green bond issuance came in at $163 billion.1 With such strong momentum in the market, we expect to see even more interest in financing all facets of sustainability this year,” says Navindu Katugampola, Head of Green, Social and Sustainability Bonds at Morgan Stanley.

While green bond proceeds are tied to environmental projects, social and sustainability bonds can be used to finance specific social causes and/or a mix of social and environmental initiatives. The groundswell in sustainable investing has certainly fueled the rate at which companies are jumping on green and social bonds, but it isn’t the only reason. Companies can use them to showcase their ESG strategies to institutional and retail investors alike.

“Sustainable bonds offer more than just access to capital,” says Hilary Irby, Co-Head of Global Sustainable Finance at Morgan Stanley. “They can be a valuable tool for issuers to communicate their priorities to investors. Bonds can send important signals to the market about sustainability strategies; demonstrate proactive risk management, and long-term thinking, while offering a financing and communications tool that is tied to measurable results.”

To provide a holistic approach, Morgan Stanley established its Global Sustainability Bond Leadership Council in 2017 to oversee and coordinate the development of the firm’s green, social and sustainability bond franchise. The Council guides firm strategy for client solutions, investor engagement and thought leadership in this rapidly changing market.

Shifting Demand

Sustainable investing has been increasing for some years, but global developments, such as the signing of the Paris Accord in 2015, have catalyzed much broader interest among investors about the benefits that a strong ESG policy can have on a long-term investment. Consumer preferences are shifting toward companies that produce sustainable products, or ensure that their business activities are responsible. Among U.S. consumers, 87% will buy products based on their values and 76% want companies to address climate change.2 “By issuing a sustainable bond,” notes Irby, “a company can broadcast to the market that they are cognizant of changing trends in the market place, and that they are preparing for a more sustainable future.”

Keeping up with new regulations is one reason why two gender-equality bonds were issued in 2017 by separate Australian financial institutions. To signal their support of gender diversity to the Australian government’s Workplace Gender Equality Agency, the National Australia Bank issued an A$500 million gender equality bond3 in March, 2017; the proceeds were lent to Australian companies that actively foster gender equality. In November, Australian insurer QBE followed with the first U.S.-dollar-denominated gender equality social bond by a private sector entity.4 QBE will use the US$400 million in proceeds to buy bonds in companies that have signed onto the United Nations’ Women’s Empowerment Principles.

A Wider Investor Audience

The broader investor base is sitting up and taking notice of sustainability, considering ESG factors to help manage risk and create new value. Asset managers have been among the loudest voices. In January 2018, BlackRock’s CEO issued an open letter5 calling on companies and investors to consider the role they can play to advance positive social outcomes. PIMCO, another global asset management firm, is encouraging issuers to tie financing to the UN Sustainable Development Goals (SDGs),6 which address a broad swath of environmental and social challenges.

Katugampola sees the SDGs as a major force driving new sustainability bond issuance. “They have become a framework through which companies and investors alike can make sense of the world’s most pressing challenges. Their breadth makes them ripe for sustainability bonds that couple social and environmental impact.”