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The sustainable investor for a changing world

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Green, social and sustainability bonds provide financial support for projects and activities that have a positive impact on the environment and/or society. Issued by companies as well as governments, these ‘purposeful’ debts are enjoying growing success.  

The growing awareness of governments, businesses and wider society of the need to tackle major environmental and social challenges has spawned greater demand for innovative sources of public and private loan finance across a broad spectrum of sectors.

Green bonds to tackle global warming

The European Investment Bank and the World Bank issued the first green bonds in response to the 2007 IPCC report linking human activities to global warming. The aim was to address this major challenge with the help of financial markets, specifically via the bond market.

The idea behind green bonds is to provide a source of capital for projects or activities that have a positive impact on the environment. Major areas of focus are sectors such as renewable energy, low-polluting transport, green building construction, water management and pollution control.

Bonds that address poverty, inequality and social exclusion

Social bonds have a different focus. They are designed to support projects and activities that address a social issue, including combating poverty and providing social housing, or striving for greater equality, diversity and social inclusion.

As part of the response to the Covid pandemic we have seen huge growth in issuance of social bonds.

For example, the EU’s EUR 100 billion Support to mitigate Unemployment Risks in an Emergency (SURE) programme was launched to give member states the financial means to fight the negative economic and social consequences of the coronavirus outbreak. Other government-backed programmes have issued debt to bolster unemployment initiatives, helping preserve jobs amid the severe economic shock.

Finally, sustainability bonds involve debt raised to finance projects that have both environmental and social goals, these two aims often being linked. As such, they can be effective in addressing the objectives of a number of the UN’s Sustainable Development Goals.

Beware ‘social washing’

It should be noted that not all social bonds are created equal. Investors need to be on the lookout for ‘social washing’ – where issuers say proceeds will go to certain causes when funds are actually directed elsewhere, for example, to areas that do not maximising the positive impact on society.

The International Capital Markets Association’s Social Bond Principles (SBP) provide strong guidelines to determine the types of projects considered eligible for funding by these securities.

At BNP Paribas Asset Management, we assess social bonds based on these principles. In particular, we verify the alignment of the social ‘use of proceeds’ with SBP-eligible categories and their contribution to ‘social sustainable development goals’ (SDGs).

Europe – The global leader in green, social and responsible bonds

Green, social and responsible bonds have quickly carved out a place for themselves.

In 2021, nearly USD 650 billion of these types of bonds were issued, twice the amount issued in 2019.[1] According to Moody’s, this market could grow to USD 1 350 billion by the end of 2022.[2]

While green bonds dominate, representing nearly 60% of issues in 2021, social and responsible bonds have been on the rise, a trend probably linked to the social issues that have been – and still are – at the heart of the Covid health crisis.

Europe dominates the global market. In 2021, governments and companies in the region issued 56% of green bonds (vs. 32% in 2017), 71% of social bonds and 60% of sustainable bonds.

This is a market underpinned by demand from (mainly institutional) investors, by regulatory advances (including Sustainable Finance Disclosure Regulation), as well as by the European Commission’s commitment (e.g. the SURE programme).

Determined to become a leader in responsible finance, the EU issued its first green bonds in October 2021 to finance European companies involved in the ecological transition.

BNP Paribas Asset Management’s participation

To meet the growing demand from investors who wish to participate in this market, BNP Paribas Asset Management has developed a strategy that replicates the JPMorgan ESG Green, Social & Sustainability IG EUR Bond index. This GSS strategy offers investors exposure to green, social and sustainability bonds issued by sovereigns, quasi-sovereigns, companies and supra-nationals.

References

[1] Source: Moody’s and Environmental Finance  

[2] Source: Moody’s, ESG, Sustainable bonds to hit record USD 1.35 trillion in 2022

3 ESG: environmental, social and governance

Disclaimer

This material is issued and has been prepared by a representative of BNP PARIBAS ASSET MANAGEMENT Australia Limited (“BNPP AMAU”) AFSL 223418 ABN 78 008 576 449.

This material is produced for information purposes only and does not constitute:

1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or
2. investment advice.

Opinions included in this material constitute the judgement of BNPP AMAU at the time specified and may be subject to change without notice. BNPP AMAU is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.

Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to the financial instruments may have a significant effect on the results portrayed in this material.

All information referred to in the present document is available on www.bnpparibas-am.com

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