Nowadays, impact bonds come in many different flavours: green bonds, social bonds, SDG bonds, sustainability bonds, to name but a few. They work the same way as regular bonds, except that the issuer - corporates and (sub-)sovereigns - promises to allocate the proceeds to projects and assets that aim to achieve positive impact according to a predefined framework. The issuer, moreover, is obliged to report on the impact results. Impact bonds have therefore become an important asset in our bond portfolios.

Additionality is important selection criterium

We first determine if the impact bond meets the standards of the International Capital Markets Association and if the issuer meets our minimum standards.

The next step is a thorough analysis of its impact framework. The rationale of this framework is very important to us. We find it particularly interesting when the balance sheet of an issuer becomes more sustainable because of an impact bond issuance. This is referred to as the additionality of a bond. Whether a framework is linked directly to the general corporate and sustainability strategies of the issuer is crucial. A grid operator that issues green bonds to enable more renewable energy capacity in the grids, yes! A bank that issues green bonds to refinance its general mortgage loan book, no!

Bond Analyst Jie Chen

To avoid greenwashing, we prefer frameworks that allocate the proceeds to new or recent projects. We assess this on a case-by-case basis and take the business model and activities of the issuer into account. And of course, we speak with the issuer to understand their ambition, strategy and the impact they aim to achieve. Once invested, we continue our dialogue with the issuer and check the reported impact on a yearly basis.

Saxony-Anhalt - Building social resilience

A recent addition to the Triodos Euro Bond Impact Fund portfolio is the debut Saxony-Anhalt social bond.Saxony-Anhalt is one of the smaller German states that, also fuelled by the impact of COVID-19, aims to prepare better for future crises and increase the resilience of its citizens and the economy.

The proceeds of the bond will be used to finance and promote social sustainability, focusing on affordable basic infrastructure, employment generation, socioeconomic advancement and empowerment, and access to essential services.

The bond’s framework is very transparent, disclosing a full list of social projects eligible for funding. Each project has a clear description, targeted population, contribution to SDG goals and planned impact indicator(s).

One project is a EUR 320 million grant programme for university hospitals, which faced capacity restrictions during COVID-19. Costs in the medical, economic and maintenance areas as well as in personnel requirements have all increased. The grant enables hospitals to counter pandemic-related shortfalls and make much-needed investments, such as digital care to strengthen the state’s health sector.

National Grid - Transitioning towards a clean energy economy

A second recent addition is the 2021 Green Bond issued by National Grid, an energy company operating in the UK and the US. This brings us to another important sustainability challenge: a future with clean and affordable energy.

An upgraded and expanded electric grid is the backbone of the energy transition and a key requirement of any realistic decarbonisation pathway. In the coming decades, grid operators like National Grid need not only to renew their aging infrastructure to withstand more extreme weather events, but also build new connections and repurpose their existing assets to handle burgeoning and more decentralised renewables generation. Non-synchronous resources such as wind and solar lead to greater instability in the grids. Grid operators must invest in their networks and operation systems to ensure security supply and to prevent blackouts and leakage.

The 2021 Green Bond from National Grid finances six eligible green projects, including two interconnectors, one between UK and France, the other one between UK and Belgium. Interconnectors, which are subsea electricity cables connecting the UK and Europe, enable the import of energy from European neighbours, supporting supply security and potentially reducing carbon emissions. 98% of the proceeds are used to either integrate and enhance the capacity of renewable energy in its transmission and distribution networks or to directly increase energy production from both solar and wind. The remaining 2% are used for electricity smart meter upgrades that contribute to increased energy efficiency.

By the end of 2022, the green bond contributed to avoiding (an estimated) 16,264,282 tonnes of CO emissions. It also delivered an additional capacity of 2,436 MW renewable energy connected to the systems, and saved energy of 8,800MWh.