Sustainable Bonds – Investing Sustainably Isn’t Just for Stock Markets

Who would have thought you could help save rhinos and make an investment return?

Historically, anyone who wanted to invest sustainably had to look to global stock markets (shares) to do so. Few options existed at the lower end of the risk spectrum, except for a few eco-banks such as Triodos and The Co-Op.

Morningstar noted that, as of 2023, the global bond market, valued at $300 trillion, significantly outweighs the global stock markets, which stand at $124 trillion. This market, with its diverse range of issuers including governments, local authorities, corporations, and supra-nationals like the European Investment Bank, WTO, and World Bank, presents an oddity.

Despite its size and diversity, there has been little opportunity for investors concerned about the impact of their money to invest at the lower end of the risk spectrum. Until now…

Bonds: A Reminder

Before I proceed, as a reminder, a bond in this context is a loan by investors to governments and organisations to help them fund projects. In return, investors receive their capital back at the end of a defined term and interest payments during it. Read this article if you want to understand more.

The Rise of Sustainable Bonds

As demand and awareness of global environmental and social issues have grown so too has the market for sustainable bonds. Not only are more organisations issuing bonds with a sustainable theme, but there is variation in the different types of bonds being issued.

Green Bonds

Issuers specifically earmark green bonds to finance projects that promote environmental sustainability, such as renewable energy, energy efficiency, pollution prevention, and sustainable agriculture. They dedicate the proceeds from green bonds solely to these environmentally beneficial projects, offering investors transparency and accountability regarding the use of their funds.

Social Bonds

Social bonds are issued to fund projects with positive social outcomes, addressing issues such as affordable housing, healthcare access, education, and community development. Investing in social bonds enables investors to support initiatives that improve quality of life, promote social equity, and address key societal challenges.

Sustainability-Linked Bonds

The market has seen a rise in the popularity of sustainability-linked bonds. Unlike traditional bonds, where the capital raised is specifically for sustainably themed projects, these bonds involve the issuer committing to achieving organizational-based sustainability targets. If the issuer fails to meet these targets, they must improve the loan’s terms to benefit the investor, such as through higher interest payments.

Rhino Bonds

This unique investment ties the return to the successful outcome of a project, specifically the preservation of Black Rhinos. The World Bank issued a £50m bond in 2020. It is a five-year investment where investors will only see a return if rhino numbers in Kenya and South Africa, the project’s focus areas, increase over the period.

Thus, while mainstream news often focuses on environmental and social problems, opportunities now exist for investors to be part of the solution, regardless of their investment risk tolerance level.