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ESG Bonds – is not something we typically cover and are usually overshadowed by ESG equity investing

From our Good Intentions study, just under 50% of faith-based asset owner investment policies addressed bonds (relative to over 75% for equities), so there’s room to learn.

Global ESG bond issuance is about US$3.4 trillion, out of an estimated global bond market capitalization of US$100 trillion, with roughly US$500 billion to US$1 trillion in new issuance on average over the past 5 years, representing roughly 10% of all new corporate issuance. There are four general types of ESG Bonds:

Green Bonds: the oldest category of ESG bonds (since just 2007), where money raised from issuance is solely used to finance positive environmental impact projects. The largest issuing group is corporations and financial institutions. While green bonds fully dominated issuance until 2020, they represent roughly 2/3rds of new ESG bond issuance in 2022, closer to 100% prior to 2019, and approximately 85% of all outstanding ESG bonds.

Social Bonds: like green bonds, money raised from issuance finances projects with social benefits such as affordable housing, clean water, healthcare and education projects. Social Bond issuance was miniscule until 2020, where growth was fueled by covid-related transactions. The majority of issuance is from government agencies and “supranational” organizations like The World Bank or European Union.

Sustainability Bonds: a newer category of flexible issuance that involves financing (or re-financing) of green or social projects. Given their blended nature, issuers are also a combination of green and social bonds, with supranationals and corporates / financial institutions representing ¾ of issuance. Total issuance size and activity is similar to that of social bonds, though in-part given their flexibility, sustainable bonds have been more popular than social bonds over recent years.

Sustainability-Linked Bonds (SLB): the newest category of ESG bond issuance where certain bond attributes vary based on links and targets for specific pre-defined sustainability goals. However, unlike other ESG bonds, issuance proceeds generally do not need to be used for specific ESG purposes, instead funding typically general corporate activities, with incentives for the corporation to meet or exceed certain ESG metrics in a specified timeframe, such as overall emissions targets.

These are more complex issuances, though rising in popularity given their impact on overall corporate behavior, there are some concerns about monitoring and greenwashing. A more thorough description can be found from the World Economic Forum here. This is the smallest, though recently fast growing category of ESG bonds, with just approximately US$70 billion issued in 2022.

A nascent fifth category is emerging with just US$15 billion of issuance in 2022 – Transition Bonds – aimed at financing green projects in traditional “high emitting or hard to abate” companies who typically cannot access green or sustainable bond markets.

Each bond types has various standards setting organizations, like ICMA or SASB. Overall, aside from green bonds, the other types are considered fairly nascent, with the markets, reporting and oversight still maturing.


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