Social, Sustainability, and Sustainability-Linked Bonds
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Abstract
The rise of sustainable investing in fixed-income markets has led to a variety of special types of bonds. In addition to green bonds that are predominantly used to provide capital for the energy transition, social, sustainability, and sustainability-linked bonds have also appeared recently in financial markets. We explain the differences between each of these bond types, the developments, and the composition of the markets. Because yield differences between sustainable and conventional bonds are small and correlations high, the risk and return profile of the portfolio is unlikely to change much when certain conventional bonds are replaced with sustainable bonds with similar characteristics, whereas portfolio sustainability may improve. The lack of clear rules and standardization for these new bond types risks leading to greenwashing by bond issuers. Consequently, investors aiming to avoid greenwashed portfolios are required to set up their own sustainability frameworks.