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Sustainable finance linked bonds and loans in the capital markets

Torys | David A. Seville, Janet Holmes, and Michael Murphy | Mar 23, 2021

Green finance - Sustainable finance linked bonds and loans in the capital marketsSustainable finance continues to gain momentum as governments and corporate issuers pay increasing attention to environmental, social and governance (ESG) factors and investors, regulators and other stakeholders encourage more robust ESG practices.  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 manner that addresses environmental and social challenges. The global market for sustainable finance totaled US$732 billion in 2020, up 29% from US$565 billion in 2019, with responding to COVID-19 ranking 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 transportation.

Market offerings in sustainable finance include green bonds, green loans, social bonds, sustainability bonds, sustainability-linked bonds and loans, transition bonds and Sustainable Development Goals-linked bonds (SDG-linked bonds). In this article, we discuss these instruments and relevant examples from the Canadian and global markets.

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Green bonds:  The proceeds of green bonds are exclusively applied to finance or re-finance new and/or existing “Green Projects” as defined by the Green Bond Principles issued by the International Capital Markets Association (ICMA).  Green Projects should provide clear environmental benefits that can be assessed and, where feasible, quantified by the issuer. The green bond market dates back to the inaugural green bond issuance by the World Bank in November 2008 and is the most well-developed of the sustainable finance markets. These bonds require the issuer to deploy 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.

Green loans:  Green loans are similar to green bonds in that funds are made available exclusively to finance or re-finance new and/or existing eligible “Green Projects” as defined in the Green Loan Principles9 developed by the Loan Market Association. Green Projects are defined the same way under both the Green Bond Principles and the Green Loan Principles, thereby providing issuers with the flexibility to choose between debt financing options for Green Projects.  You can read more about green loans and other sustainable loans in “Trends in ESG loans”.

Social bonds:  The proceeds of social bonds are exclusively applied to finance or re-finance new and/or existing “Social Projects” as defined in ICMA’s Social Bond Principles. Social Projects include providing and/or promoting affordable basic infrastructure, access to essential services, affordable housing and food security.

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Sustainability bonds:  Sustainability bonds are instruments whose proceeds are exclusively applied to finance or re-finance a combination of both Green Projects and Social Projects in accordance with ICMA’s Sustainability Bond Guidelines.  Sustainability bonds may be an attractive option for issuers that would like the flexibility to allocate proceeds among Green Projects and Social Projects without having to issue separate bonds.

Sustainability-linked bonds and loans:  Sustainability-linked bonds and loans differ from green bonds, green loans, social bonds and sustainability bonds in that the proceeds do not need to be used to finance Green Projects and/or Social Projects. Instead, the borrower’s achievement of (or failure to achieve) predetermined sustainability performance objectives (e.g., a reduction in greenhouse gas emissions, or increased use of renewable energy), external ratings and/or equivalent metrics can result in a decrease (or increase) in borrowing costs. These bonds require specified pre-issuance disclosure such as an overall sustainability strategy, identification of the precise targets and performance indicators, and post-issuance verification of performance.

Transition bonds:  Transition bonds are similar to sustainability-linked bonds and loans in that they do not generally require proceeds to be used to finance or re-finance Green Projects. Instead, the proceeds of transition bonds are used to fund a firm’s transition towards a reduced environmental impact or to reduce the firm’s carbon emissions.

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Transition bonds may be an attractive option for issuers that are taking meaningful steps to reduce their environmental impact but do not have significant projects that would qualify as Green Projects and therefore would be unable to issue green bonds. These bonds require the publication of a transition framework, disclosure in line with the TCFD recommendations, commitment to the goals of the Paris Agreement or approved targets to achieve zero emissions by 2050, and reporting on transition performance.

SDG-linked bonds:  SDG-linked bonds include covenants based on the United Nations’ Sustainable Development Goals and the issuer is penalized if it fails to meet these covenants in the agreed timeframe.

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NCFA Jan 2018 resize - Sustainable finance linked bonds and loans in the capital markets The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit:

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