Designated green and social bonds have specific impact frameworks to which the bond proceeds must be earmarked and are often aligned with international standards such as the Climate Bonds Initiative or the International Capital Markets Association’s (ICMA) Social Bond or Green Bond Principles. Most issuers will engage a third-party opinion provider to evaluate the bond framework for its alignment with these standards.
Social inclusion through employment
Instituto de Crédito Oficial (ICO)'s business purpose is to facilitate the development of the Spanish economy and enhance Spain’s economic cooperation with foreign countries. It does so by providing financial support for export and import transactions and domestic infrastructure projects. Via its venture capital and equity investment arm, ICO engages in projects involving transport infrastructure, energy, social aspects and services.
The ICO social bond in our portfolios is issued to stimulate employment generation and retention, which is one of the categories defined by the Social Bond Principles. The bond fits our Social Inclusion and Empowerment theme. The proceeds of this bond are used to finance small and medium-sized companies (SMEs) in economically underperforming regions of Spain. These companies are not engaged in any business activity described under ICO’s exclusionary criteria. The proceeds of the bond of EUR 500 million were used to finance 7,177 projects, through which an estimated 61,826 jobs were created or retained.
Although ICO provides loans to SMEs through other financial institutions, it relies on its own expertise to select companies that align with its eligibility criteria. This process ensures that ICO alone selects the SME loans for the social bond and not the financial institutions. ICO periodically reviews a sample of SME loans and undertakes site visits to assess if the receiving companies are using the loan for the intended purposes as mentioned in their loan application. On the loan’s first anniversary, independent ESG rating agency Sustainalytics reviews a sample of loans and evaluates compliance with the eligibility criteria.
Broad environmental impact
Nordic Investment Bank (NIB) operates as an international financial institution and is owned by Sweden, Norway, Denmark, Finland, Iceland, Lithuania, Latvia and Estonia. The bank finances projects that improve productivity and benefit the environment of the Nordic and Baltic countries, to promote a prosperous and sustainable Nordic-Baltic region. This mission was given by the bank’s owner countries to address the needs of the region and the challenges it faces; sustainable growth, technological innovation, climate change, the development of a circular economy and the protection of marine environments.
Nordic Investment Bank has issued environmental bonds since 2011 and is a member of the Executive Committee of the Green Bond Principles.
The NIB environmental bond in our portfolios was issued to finance environmental projects that support the transition to a low carbon economy. Falling into seven project categories - Energy Efficiency, Renewable Energy Generation, Transmission and Distribution & Storage Systems, Clean Transport Solutions, Resources and Waste Management Systems, Water Management Protection and Green Buildings - the projects fulfil at least one of the following objectives: pollution reduction, preventive measures, resource efficiency or climate change mitigation. Examples of projects financed by NIB are the SFE hydropower plant in Norway, which has a generation capacity of 47 MW of clean energy, and the refurbishment of stores of Lithuanian food retailer Maxima to improve their energy efficiency, which should lead to a reduction of 30% in energy use.
NIB has a separate Sustainability and Mandate unit. This unit assesses whether new projects fulfil the framework requirements. The unit performs a qualitative sector assessment and a project-specific quantitative analysis. All projects also undergo a review of the environmental and social risks as well as resilience towards the effects of climate change.
Social and green bonds contribute to the key role that debt markets play in funding projects that address global social and environmental challenges.
The Climate Bonds Standard and Certification Scheme is a labelling scheme for bonds. Rigorous scientific criteria ensure that it is consistent with the 2 degrees Celsius warming limit in the Paris Agreement. The Scheme is used globally by bond issuers, governments, investors and the financial markets to prioritise investments which genuinely contribute to addressing climate change.
The Social Bond Principles (SBP) and the Green Bond Principles (GBP) promote integrity in the social bond market through guidelines that recommend transparency, disclosure and reporting. Issuance aligned to the SBP and GBP should provide investment opportunities with transparent social and green credentials. By recommending that issuers report on the use of social or green bond proceeds, the SBP and the GBP promote a step change in transparency that facilitates the tracking of funds into social or green projects, while simultaneously aiming to improve insight into their intended impact.
The European Commission is currently developing the technical specifications for an ecolabel for financial products. The criteria for the EU Ecolabel for bond funds focus exclusively on so-called green bonds. We fear there will be serious omissions in the EUs sustainable bond investing criteria. Read Rosl Veltmeijers column.
Download our whitepaper A call for radical transformation to learn more about our seven transition themes.
Explore our Impact Equities and Bonds impact report ‘Moving the needle’ to find out more about our role as impact investor. The report presents our 2019 results in a context of numbers and stories and showcases our mission to make money work for positive change.