Sustainable finance in the markets

Interest in sustainable finance accelerated in 2020, with the COVID-19 pandemic highlighting the need for funds to help economies, businesses and individuals recover in a responsible way that addresses environmental and social challenges1 . The global sustainable finance market totaled US $732 billion in 2020, up 29% from US $565 billion in 20192 , and the COVID-19 ranked fifth in terms of value for use of proceeds among bonds issued in 2020, behind renewable energy. green buildings, access to essential services and clean transportation3 .

Market offerings in sustainable finance include green bonds, green loans, social bonds, sustainability bonds, sustainability-linked bonds and loans, transition bonds, and bonds linked to the Sustainable Development Goals (SDG-linked bonds). In this article, we discuss these market instruments.

Sustainable Finance


Green bonds

What they are: Green bond proceeds are used exclusively to finance or refinance new and/or existing “Green Projects” as defined in the Green Bond Principles issued by the International Capital Markets Association (ICMA) 4 .

Green Projects must provide clear environmental benefits that can be assessed and, where feasible, quantified by the issuer. The green bond market dates back to the inaugural issuance of green bonds by the World Bank in November 2008 and is the most developed of the sustainable financial markets. These bonds require the issuer to implement and track the use of proceeds according to a disclosed framework, develop a process for project evaluation and selection, and report on the deployment of proceeds. A recent case in Central America is CMI Energia, company owned by the Bosch Gutierrez family.

Green loans

What they are: Green loans are similar to green bonds in that funds are available exclusively to finance or refinance eligible new and/or existing “Green Projects” as defined in the Green Lending Principles9 developed by the Loan Market Association. Green Projects are defined in the same manner in both the Green Bond Principles and the Green Lending Principles, giving issuers the flexibility to choose among debt financing options for Green Projects.

Sustainability Bonds

What they are: Sustainability bonds are instruments whose proceeds are used exclusively to finance or refinance a combination of Green Projects and Social Projects in accordance with ICMA’s 12 Sustainability Bond Guidelines .

Sustainability bonds can be an attractive option for issuers who want the flexibility to allocate proceeds between Green Projects and Social Projects without having to issue separate bonds.

Sustainability-linked bonds and loans

What they are: Sustainability-linked bonds and loans differ from green bonds, green loans, social bonds and sustainability bonds in that the proceeds must not be used to finance Green Projects and/or Social Projects.

Instead, the borrower’s achievement of (or failure to achieve) predetermined sustainability performance targets (e.g., a reduction in greenhouse gas emissions or increased use of renewable energy), external ratings and/or equivalent metrics may result in a decrease (or increase) in borrowing costs. These bonds require specific pre-issuance disclosure, such as an overall sustainability strategy, identification of precise performance targets and indicators, and post-issuance performance verification.


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Carla Fowler

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