Demand for ESG bonds now outstrips supply as sustainability becomes an increasing priority for investors, lenders and other stakeholders. We explore whether issuing ESG bonds is an appropriate way to speed up your access to funding.

Stakeholders have significantly increased their focus on ESG in recent years and this has led to rapid growth in the ESG bond market – with issuances expected to reach US$1 trillion in 2022. Many investors and lenders now actively seek ESG credits and companies across all sectors need to be aware that non-ESG funding may become increasingly difficult to obtain.

The benefits of issuing ESG bonds

To mitigate this risk, it’s worth exploring the benefits of issuing ESG bonds. The two main merits of doing this are:

  • You’ll be tapping into a market where there’s a high demand from investors. This offers pricing benefits.
  • You’ll gain from positive publicity and give your stakeholders a clear signal that you take your ESG responsibilities seriously. This should benefit your business and enable you to diversify your investor base.

Key requirements for issuing ESG bonds

The requirements for issuing ESG bonds vary depending on which type of bond you want to issue.

  • Use-of-proceeds bonds (UoP Bonds): You’ll need to have ‘green’ and/or ‘social’ projects or assets and will have to use your bond proceeds exclusively for those projects. An example of a green purpose might be funding a waste to energy project or the retrofitting of properties to make them more energy efficient and an example of a social purpose might be the provision of affordable housing.
  • Sustainability-linked bonds (SLBs): You’ll need to have a sustainability/ESG strategy and set yourself sustainability performance targets. Key preparatory steps are to:
    • review your business and its key ESG impacts
    • adopt a strategy that seeks to neutralise these impacts
    • put in place relevant targets and a timeline in which to achieve them
    • establish systems that will enable you to measure and report on your progress.

Typically, this process takes at least 12 months. In the meantime, you may want to consider issuing UoP Bonds.

Compliance issues for ESG bonds

For UoP Bonds, if you don’t comply with the use of proceeds restriction, you will not default. However, you will suffer significant reputational damage for green-washing. You may also find it difficult to access funding in the future. For SLBs, if you don’t meet your sustainability performance targets, the usual structure is that the coupon payment will ratchet up but, again, there will be no event of default.

The process for issuing ESG bonds

If you’re considering issuing ESG bonds, you will find that the process is largely the same as for conventional bonds. However, there are a few additional requirements that you will want to understand before making a final decision so it’s important you take professional advice.