In the first nine months of 2023 alone, US$698 billion worth of impact bonds were issued, as reported by Insight Investment research.
A decade after the first impact bond, the impact bond market has grown to over $3 trillion. The research found green bonds leading the market, raising over $1.43 trillion since 2007, with over 500 entities issuing them during this period.
Sovereign and supranational impact bond issuance is on the rise, as indicated by the research. Notably, the UK and European Commission issued their inaugural green bonds in 2021, setting a “record” with €12 billion raised through 15-year debt. These funds are earmarked for energy and transport projects across EU member states.
Social bonds have paralleled the growth of green bonds, especially post-Covid. While social bond issuance in 2021 rose 1.4 times compared to 2020, the focus of the impact bond market has shifted to “climate change”. Green and sustainability bond issuance more than doubled between 2020 and 2021 and has maintained dominance since.
The study also detected “impact-washing” as a reality – issuers labelling their bonds as impactful with little intention of using the proceeds toward any demonstratable impact. “Out of a total of 1,235 impact bonds we have rated from end 2017 to end of September 2023, it has been concerning to see that 21% have not met our requirements of a genuine impact bond,” shared the researchers.
“Positive environmental and social impact and sustainable outcomes in fixed income can be achieved in three ways: use-of-proceeds/impact bonds; investing in companies that generate revenue from sustainable activities; and investing in companies with capital expenditure in sustainable activities,” they added.
The new EU Green Bond Standard, built on the International Capital Market Association Green Bond Principles, sets a benchmark for disclosure and ongoing reporting. However, according to the researchers, the requirement for 85% of proceeds to align with the EU taxonomy poses a challenge for issuers and may limit the standards’ global impact, potentially leading to diverging standards across regions instead of fostering international standards improvement over time.
Without more formal enforcement, investors must conduct thorough due diligence to avoid being deceived by “impact washing,” especially given the voluntary nature of the EU Green Bond Standard, they concluded.
