Building a better world: How investing in sustainable bonds can drive social change

A business in the United Kingdom is significantly improving the lives of those with disabilities. Through issuing a sustainable investment known as a social bond, the UK-based Picture Motability has been able to fund or refinance vehicles, powered wheelchairs and scooters for its customers.

This project improves the beneficiaries' health and well-being in addition to reflecting the company's commercial goals. Meanwhile, investors in Motability’s social bonds are provided with transparent reports of how the funds are being allocated as part of stringent reporting requirements.

According to AXA Investment Managers, investors have an opportunity to contribute to projects that address social as well as environmental challenges, while also possibly generating financial returns, by investing in social bonds.

Sustainable bonds have emerged in recent years as an innovative tool to finance initiatives that foster social progress and environmental sustainability. These instruments have gained importance in a fixed income portfolio due to their potential for returns and their role in contributing to a more sustainable future.

Furthermore, the International Capital Markets Association (ICMA) provides principles to maintain the transparency and integrity of these bonds, thus establishing globally-recognised standards for this asset class.

Green bonds are a category of sustainable bonds that are used to finance a diverse range of projects that yield environmental and climate benefits, from renewable energy to biodiversity conservation. They have witnessed rapid growth since their inception in 2007, driven by a surge in environmental consciousness and increasing regulatory requirements related to sustainable practices. 

Reflecting their popularity, the number of green bond issuers have grown from just a few supranational bodies and utilities to more than 600 issuers, with more than half comprising corporations and financial institutions.

Transparency and outcome-driven processes are fundamental to green bonds. Investors are provided with clear reports about how funds are allocated and the environmental benefits derived. Through such reporting, investors can easily gauge a project’s green credentials and measure its environmental benefit.

When considering risk, green bonds have proven themselves as a credible alternative to traditional bonds. They offer a highly-rated market evenly split between sovereign or sovereign-related and corporate debts, with relatively similar sensitivity to interest rates to that of conventional bonds.

However, investors should note that not all green bonds are the same, and they should ensure that their portfolios are made up only of projects that meet key criteria and reflect the issuer’s sustainable strategy.

The other category of sustainable bonds are social and sustainability bonds. The former finance projects designed to address social issues, while the latter fund a combination of green and social projects. They serve as important tools to support initiatives like affordable housing, healthcare and education. Similar to green bonds, these investments also emphasise transparency and outcome-based metrics. 

The issuance of social and sustainability bonds by governments and corporations has started to gain traction in recent years, encompassing more social themes than ever before. But when choosing bonds, investors will need to exercise greater caution as the market expands to assure the legitimacy of the projects being financed.

While still at a nascent stage, the future of sustainable bonds as an asset class is promising, and is expected to continue growing with greater regulation and the support of ICMA guidelines. Social and sustainability bonds may eventually considerably facilitate the transition to a more just and equal society.

The concept of greenium or green premium refers to the potential price advantage that green, social and sustainability bonds could offer over conventional bonds. The relevance of greenium was illustrated when Austria issued a green bond at a lower yield than its conventional counterpart. 

Greenium, however, can vary depending on the sector and the robustness of the issuer's sustainability strategy. In times of market turmoil, greenium can also act as a buffer, potentially reducing the volatility of a portfolio. As such, with sustainable bonds, investors may enjoy a better risk-adjusted return over the long term.

Sustainable bonds in all its forms can offer investors a financially and socially responsible investment opportunity. According to AXA Investment Managers, these bonds are helping to accelerate the journey towards a more sustainable future and provide investors with a chance to contribute to environmental preservation and social betterment, all while potentially earning financial returns – making them not only a viable investment option, but a catalyst for positive global change as well.

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