The sustainable bond market
In 2021, the market for sustainability-labeled debt issuance surpassed USD 1 trillion. Despite a slight reverse in 2022, sustainable debt products are expected to increase fivefold by 2025. These products play a critical role as companies and financial institutions seek to mobilize capital to advance environmental and social objectives.
Sustainable debt products fall into one of two categories – use-of-proceeds and sustainability-linked:
- Use-of-proceeds – requires funds to be allocated exclusively to projects and activities that align with specific impact categories (e.g., clean energy, affordable housing, etc.)
- Sustainability-linked – does not restrict issuers’ use of capital, instead linking the interest rates to performance against pre-determined sustainability targets (e.g., achieving X% reduction in GHG emissions by Y year)
Market growth is triggering increased scrutiny
While sustainability-linked products saw meteoric growth since their creation in 2017, use-of-proceed products have continued to make up the bulk of the sustainable debt market, constituting approximately 90% of issuance in 2022. These products, green bonds in particular, have played a role in the rise of impact investing due to their intentional goal to support positive and measurable real-world effects.
Currently, sustainable debt products are guided by voluntary standards, including the International Capital Market Association’s (ICMA) Principles and the Climate Bonds Initiative Standards. As sustainable finance matures and investor expectations become more sophisticated, sustainable debt products face increased scrutiny to demonstrate the accuracy of claimed sustainability impacts.
Benefits of enhanced transparency
To ensure sustainable debt offerings, in particular use-of-proceeds products, are seen as credible by the market, issuers need to enhance their annual impact reporting practices.
There are three key benefits for issuers who enhance the sophistication and transparency of their reporting practices:
- Higher-quality, more granular environmental and social data provides improved awareness and insights for issuers, in turn facilitating better informed decision-making
- Strong impact reporting mitigates against “greenwashing”, which can carry significant reputational risks for issuers
- Leading reporting practices can prompt increased demand from prospective investors for issuers’ products
Three ways to improve sustainable bond reporting
To improve the quality of sustainable debt impact reporting, issuers should focus on three key areas:
- Transparent allocation reporting – strive for more granular, project-level information for how proceeds are allocated to eligible activities
- Comprehensive impact reporting – provide clear calculation methodologies for impact metrics and align with emerging standards, such as the ICMA’s Harmonised Framework for Impact Reporting
- Independent verification – have allocation of proceeds and the accuracy of reported impact metrics assured by an independent third-party
If your company has or is planning to issue sustainable debt products, the Quinn+Partners team can support you to produce high-quality impact reporting that aligns with leading standards and industry best practices. To learn more, contact us today.