The Ultimate Guide to ESG Bonds

June 21, 2022

Since 2007 when the European Investment Bank issued the pioneer ESG bond, more companies have followed the same groove by producing their own bonds. Today, ESG bonds account for over 10% of all bonds globally, and they keep attracting more investors and companies. Green or ESG bonds are contributing to the achievement of the global social and climate goals, but many companies are unsure of whether to issue them or stick with the standard securities. 

To help you make the big decision about ESG bonds, here is a complete guide. Keep reading to learn what the environmental, social, and governance (ESG) bonds are, their benefits, and how they work. 

What are ESG Bonds?

ESG, shortening for environmental, social and governance, is used with reference to companies' focus and impacts on sustainability. Therefore, these bonds are instruments of raising money from the market to drive a positive and sustainable-related impact. From the face value, the bonds might appear general, but they come with specific and measurable impacts that issuers must convince investors about. 

With the growing interest in carbon neutrality, gender equity, and the drive to address the challenges facing the planet, ESG bonds have aroused a lot of interest in recent years. Indeed, you can now get ESG bonds or a sustainability fund targeting the growth in this space only. Note that the market has also grown sharply, with five years to 2021 reporting a whopping 63% CAGR. 

When planning to issue bonds, the approach is similar to that of a standard bond, where underwriters are hired before the bond is announced. Then there is initial price guidance, invitation of bids, final price guidance, and the pricing of the bond. 

Unlike stocks or other instruments, ESG bonds will provide investors an excellent opportunity to identify major risks, foster engagement, and nurture relationships on the market to help to drive long–lasting change. 

The Main Benefits of ESG Bonds 

Why issue bonds? Here are some of the main benefits of ESG bonds. 

  • Unlike stocks, ESG bonds provide predictable income security. This implies that what is paid at any one moment will not change because the returns are tied to a specific schedule. Even in times of high market volatility, investors are assured of returns at a predetermined rate. This ability to calculate the expected return on investment is what has been attracting more people to ESG bonds.   
  • ESG bonds have a lower risk compared to other fixed income investments because the credit peril is low. The fact that they carry the guarantee of the issuer to return the face value of the security holder makes more investors, especially those not ready to take very high-risks, consider them reliable. 
  • Most ESG bonds come with a tax exemption of up to 75%, but this depends on the country. In Canada, investors do not pay any taxes on the interest from bonds. In the US, some states such as New Jersey and California also exempt generated interest from taxes. 
  • ESG bonds are assigned higher ratings compared to the traditional company bonds by Fitch, Moody’s, and Standards & Poor’s. This means that investors get to enjoy lower interest rates or buy the issue at a lower dollar price per unit compared to the traditional corporate bonds. 
  • ESG bonds offer investors the best opportunity to target assets that demonstrate environmental, social, and governance responsibility. Therefore, they are able to align their investments with ethical concerns and personal values
  • ESG bonds provide a good option for investors looking forward to diversifying investment portfolios. For example, most investors believe that buying only one security, such as stocks or traditional bonds, is pretty risky. Therefore, ESG bonds open a new line of investment to help them offset volatility and generate higher returns. 
  • Before they can be listed on the market, ESG bond issuers have to provide detailed information concerning their investment strategies and performance via annual reports, documentation, and press releases. This transparency allows investors to comprehensively scrutinize them and pick the one they consider to have higher potential. 

Get Assistance from Experts 

As we pointed out already, ESG bonds are relatively new financial investment tools on the market. They are also lucrative projects for issuers to undertake. However, they require companies with demonstrable focus on environmental, social, and governance (ESG) matters. This means that you need to have a clear ESG plan that demonstrates total commitment to sustainability. So, this is an excellent point to start and then navigate towards issuing an ESG bond. 

More stakeholders will dig deeper into your company when carrying out due diligence and it is important to have all the details available. To provide accurate ESG reporting, you have to review the company's operations, engage stakeholders, and run a materiality assessment. This will give you high potential reporting topics to focus on. 

We must indicate that although investors mainly look at the report, your company should do more than simply focus on the publication. The best approach is to ensure that the entire company is moving towards enhancing sustainability in its system. Then, gather data accurately, analyze it and prepare accurate reports. This is never easy for many companies, and it is advisable to work with experts and the right program. 

At Diginex.com, we have the best experts who can hold your hands in the sustainability reporting journey. They will help you to define the roadmap to ESG bonds issuance. For example, you can target cutting down energy use, treating wastes, and increasing focus on the global supply chain for raw materials to become more sustainable. They will also assist you understand ESG reporting to realize all the benefits that come with sustainability reporting. 

In addition to having globally revered experts, we also have the best ESG sustainability reporting applications. You might want to check BlackRock Bond Pyramid and our diginexESG, which uses the latest blockchain technology to help your company address the most challenging sustainability issues. This is what most investors looking for ESG bonds want to see. Other apps that you can use are the high-potential diginexLUMEN and diginexCLIMATE.

In this post, we have demonstrated that ESG bonds are growing in demand, and you should not be left behind in using the instruments for stakeholders looking forward to adding a new feather to their equity baskets. At Digienex.com, we are ready to help you make your sustainability journey that will culminate in the ESG bonds issuance a success. Contact us now for all that you need to know about ESG, ESG reporting, ESG bonds, and sustainability. 

 

 

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