Environmental, social, and governance (ESG) investing, targeting companies that seek returns alongside social impact, has grown apace over the past year and shows no signs of abating. Bloomberg Intelligence conservatively estimates that at a 15% annual pace of growth – half the actual rate of the last five years – ESG assets under management will hit $53 trillion by 2025, representing more than a third of the projected total of $140.5 assets under management.
Equities have traditionally dominated the ESG market and will continue to do so, but the debt side of the equation will offer the most innovative solutions in addressing sustainability challenges. Enter green, social and sustainable bonds, commonly called thematic bonds.
This kind of bond is proving resilient in times of crisis as well as appealing when it comes to addressing development agendas.
LAC’s private sector is poised to capitalize on this nascent market as it shows high levels of sustainable investment opportunities, coupled with favorable yields. Despite its fast growth, LAC is undeniably lagging global volumes in terms of thematic issuance.
There’s greater clarity surrounding standards and transparency over use of proceeds: Transparency and integrity are critical to attracting private investors. ICMA principles and Climate Bond Standards – for green bonds – have helped standardize the market.
Private sector issuers are showing appetite for innovation: Until recently, the public sector dominated thematic bond issuance and accounted for two-thirds of total cumulative bond volume.
IDB Invest recently launched an executive guide, Financing Sustainability through Capital Markets, which outlines a practical roadmap for private issuers looking to issue thematic bonds while aligning with market best practices.
The take-away from the guide is that internal ESG capacity should be adequately defined and in place before an issuance; that thematic bond must be based on clear impact targets and achievable goals and, very importantly, the issuers must commit to close monitoring and transparent and regular reporting on performance to build confidence.
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