What are Green and other related ESG corporate bonds?
Green bonds, a prominent term in finance, have recently gained significant attention. These instruments, part of the broader Environmental, Social, and Governance (ESG) category, offer distinct advantages over regular bonds and play a crucial role in modern finance.
Like regular bonds, ESG bonds involve loans from investors to organizations. These loans finance projects, and investors receive their principal back with interest. ESG bonds include green, social, climate, and sustainability-linked types.
Green bonds, issued by public or private entities, finance environmental or climate change projects. They represent the environmental aspect of ESG. Projects commonly funded by green bonds include energy efficiency, renewable energy, pollution control, natural resource management, clean transportation, water management, and green building.
Social corporate bonds, conversely, fund projects improving social aspects like fighting discrimination or promoting equality. Other ESG bonds, like climate and sustainability bonds, finance projects mitigating climate impact or combining green and social initiatives.
Other ESG bonds include Climate, Sustainability, and Sustainability-linked bonds. Climate bonds finance projects that mitigate the negative impact of climate and global warming and can overlap with green bonds. Sustainability bonds are meant to finance a combination of both green and social projects.
Sustainability-linked bonds differ slightly from other ESG bonds. Their financial terms depend on achieving specific ESG metrics within a timeframe. If the issuer misses these goals, they face higher interest payments to investors.
ESG Bonds – Benefits
Companies like Apple and Starbucks have issued ESG bonds, highlighting their advantages over stocks, bank loans, and regular bonds. Unlike stocks, bonds do not dilute company ownership and offer greater stability. They also typically have lower interest rates and fewer restrictions than bank loans. Banks may impose limitations on issuing additional debt or certain transactions.
Apart from the obvious reputational benefits for both issuers and investors, what are the advantages of ESG bonds over regular bonds? ESG bonds allow issuers to tap into a growing pool of environmentally conscious investors, reducing dependence on traditional sources and enhancing financial stability. They require detailed information on fund usage, project selection, and impact, building trust and potentially earning higher ratings than regular bonds.
ESG bonds typically require issuers to provide detailed information about the use of funds, project selection, and environmental impact. This increased transparency can build investor trust and confidence in the issuer’s commitment to sustainability. Consequently, this increased transparency can result in ESG bonds receiving higher ratings than regular bonds with comparable risk profiles. For investors, ESG bonds reduce the risk of stranded assets and diversify investment portfolios, spreading risk across various sectors and projects focused on sustainability. Depending on jurisdiction, they also might offer tax incentives, such as tax exemption and tax credits.
Issuing (ESG) corporate bonds in Serbia
To issue corporate bonds, a company must comply with the applicable rules of the Capital Markets Act. This includes preparing a prospectus with detailed information on:
- Persons responsible for the documentation, third parties, expert reports, and the approval of the competent body;
- Strategies, business results, and business environment;
- Risk factors;
- Corporate governance;
- Financial information and KPIs;
- Information on shareholders or owners;
- Securities (maturity, interest, etc.).
Once the Securities Commission of the Republic of Serbia approves the prospectus, the company can publish it and commence the bond sale. They must also provide the necessary documentation to the Central Securities Depository and Clearing House regarding the individuals who purchased the bonds.
Conclusion
The worldwide ESG bond market is still expanding. It is expected to grow by an additional EUR 5 bn in 2024 compared to 2023, amounting to EUR 820 bn total, and the Serbian ESG market has shown that it is ready for the change. The Republic of Serbia issued a seven-year EUR 1bn green bond. The bond was issued at 1.00%, the lowest coupon rate ever, and a yield rate of 1.26%, while investor demand in the auction exceeded EUR 3 bn, demonstrating Serbia’s commitment to sustainability.
Considering ESG bonds about the EU’s Carbon Border Adjustment Mechanism (CBAM) is also essential. ESG bonds, especially green and sustainability-linked bonds, can aid in financing the company’s efforts to reduce CO2 emissions. Reducing CO2 emissions will eventually decrease the cost of CBAM when exporting certain goods to the EU.
