【TEJ Dictionary】ESG Bond Introduction
As the concept of ESG becomes more and more popular, various ESG-related products have started to appear in the financial market, one of which is ESG bonds.
ESG bonds are issued in the same way as regular bonds, but the difference lies in the use of the funds, which is the most important reason to differentiate ESG bonds from regular bonds.
Keywords： ESG、Bond、Green bond、Social bond、Sustainable Finance
📍 Certification Standards
📍 ESG Bond Introduction
- International Capital Market Association(ICMA)
With the rise of sustainable finance in recent years, ICMA has established a set of definitions for financial markets, including the Green Bond Principles (GBP), Social Bond Principles (SBP), Sustainability Bond Guidelines (SBG), and Sustainability-Linked Bond Principles (SLBP). It is hoped that through this framework of principles, the global debt capital markets can play a role in financing environmental and social sustainability.
In July 2021, Taiwan’s competent authority, Taipei Exchange, became the fifth member in Asia to join ICMA as a stock exchange. In accordance with the GBP, SBP, and SBG issued by ICMA, Taiwan’s sustainable development bond market system has been established. Issuers issuing bonds for sustainable development in Taiwan should apply to the Taipei Exchange for accreditation.The issuer is required to issue an evaluation report of the plan that conforms to the international financial market practice and the name of the institution or organization that has evaluated the use of funds. They are also required to report relevant information regularly to achieve the goal of assisting enterprises in implementing sustainable development, supporting their sustainable transformation, and making sustainable development a new value for Taiwan.
- The ASEAN Capital Markets Forum(ACMF)
ACMF believes that the development of sustainable finance is inevitable due to the accelerating climate change and that financing through financial markets is the cornerstone to promote and develop sustainable finance; to this end, ACMF has created the asset class of sustainable finance to support the growth of ASEAN, especially to meet the infrastructure needs of ASEAN countries. Based on the ESG Bond Principles published by ICMA, ACMF has developed the ASEAN Green Bond Standard (GBS), the ASEAN Social Bond Standard (SBS) and the ASEAN Sustainability Bond Standards (SUS) with the aim of improving transparency, consistency and uniformity in ASEAN green, social and sustainability bonds, which will also help develop new asset classes, reduce due diligence costs and help investors make informed investment decisions. This will also help develop new asset classes, reduce due diligence costs and help investors make informed investment decisions.
ESG Bond Introduction
ESG is an acronym for Environment, Social and Governance, which is a principle of CSR sustainability and a performance indicator to measure business operations, providing investors with a standard for investment reference.
Types of ESG Bonds
ESG bonds are financial instruments derived from ESG, issued in the form of bonds to achieve the sustainability objectives set by companies. The most commonly accepted standards for defining ESG bonds are the GBP, SBP, and SBG issued by the ICMA, all of which cover four core elements: “use of proceeds,” “investment plan evaluation and selection,” “capital management,” and “periodic reporting.”
- Green Bond
Green Bond means that the funds raised by the bond must be related to environmental protection, such as green building, water management, air pollution prevention, and energy conservation. All can be classified as a project. However, the bond issue must comply with GBP.
The concept of green bonds originated in Scandinavia. It was jointly proposed by the World Bank, the Swedish Scandinavian Bank (SEB), and the Climate Change Professional Organization (CICERO) to improve the global climate environment and mitigate climate change. The world’s first green bond was the “Climate Awareness Bond” issued by the European Investment Bank (EIB) in 2017. Since then, the concept of green bonds has been widely favored by governments, enterprises, and international financial companies, and the discussion of related issues has gradually expanded.
The first green bond in Taiwan was a US$300 million three-year corporate bond issued indirectly through a 100% owned subsidiary of Advanced Semiconductor Engineering, INC in 2014. It pioneered the green bond market in Taiwan and was the first green bond issued by a corporation in Asia. Since then, green bonds have gradually become popular in Taiwan’s financial market, and the number of green bonds issued each month has increased. The use of the funds raised by the company is as follows：
- Social Bond
The core concept of socially responsible bonds is that all funds raised should be used for investment projects that have a “positive impact” on society. The SBP lists six significant categories of investment projects, namely “affordable infrastructure,” “basic service needs,” “affordable housing,” “job creation,” “food security,” and “socioeconomic development and rights protection.”
The investment purpose of socially responsible bonds must include, but not be limited to, the six categories listed above. Moreover, it must provide a sound and transparent investment plan for evaluation by ICMA or other external certification bodies to determine compliance and achieve positive social benefits.
Taiwan’s first domestic corporate social responsibility bond was a NT$1.2 billion five-year corporate bond issued by Far Eastern New Century in May 2021, with the primary investment purposes including social benefit investment projects, protection of disadvantaged groups, and provision of materials for the fight against Newcastle pneumonia. The first domestic CSR bond issued by the financial sector in Taiwan was issued by CITIC Bank in May of the same year, the primary purpose of which was social and economic development and rights protection.
- Sustainability Bond
A sustainable bond is a bond whose use of funds covers both green and socially responsible bonds and must meet the four core elements mentioned above and comply with the ICMA’s SBG. Since using funds for sustainable bonds includes environmental and social areas, whether a bond is sustainable should be based on the use of funds as stated in the investment plan report.
The first sustainability bond in the world to be certified by a certification body, Vigeo Eiris, was issued in 2012 by the French region of Ile-de-France. It used the funds raised for ecological transformation and social development projects aligned with the SBG and contributed to the world’s sustainable development goals.
CITIC Bank also launched the first sustainable development bond in Taiwan, a $1 billion five-year unsecured bond to be issued in 2020, with funds raised mainly for green and socially beneficial investment projects.
- Sustainability-linked Bond
Sustainability-linked bonds, also known as sustainability target-linked bonds, are bonds whose terms of issuance are linked to corporate sustainability key performance indicators and sustainability performance targets (e.g., reduction of carbon emissions, reduction of electricity consumption, etc.). There is no mandatory requirement that the funds raised be related to environmental or social issues. A standard issuance method is to include an interest rate escalation mechanism in terms of the bond issue, i.e., to set a sustainability performance target and to increase the bond coupon rate if the company does not achieve the target.
However, if a company wants to issue SLBs, how can it make investors understand and be willing to invest? To this end, ICMA has issued a set of voluntary guidelines, the Sustainability Link Bond Guidelines (SLBP), to provide and encourage companies to follow the SLBP to establish a structure and market based on the SLBP gradually and to enhance the mutual trust of market participants. The SLBP consists of five core elements: “Selection of Key Performance Indicators,” “Calibration of Sustainability Performance Targets,” “Bond characteristics,” “Reporting,” and “Verification.” Under the SLBP, key performance indicators (KPIs) must be measurable or quantifiable, and sustainability performance targets (SPTs) are key to the construction of the SLB, i.e., the SLB uses the achievement of SPTs as the basis for changes in bond terms.
The first SLBs in Taiwan was recently issued: a 5-year $2.5 billion corporate bond issued by Far Eastern New Century and a 5-year $1 billion corporate bond issued by Chi Mei Corporation. The issuance of these two SLBs is a significant milestone for Taiwan’s sustainable development investment market and will undoubtedly bring a new atmosphere to the market.
Where to get more info?
TEJ has gone to great lengths to include ESG bonds. All bonds approved and applied for over-the-counter trading, such as green bonds, socially responsible bonds, sustainability bonds, and sustainability-linked bonds, are included in our collection according to the Over-the-Counter (OTC) Sustainable Development Bond Practice Guidelines. The following picture shows a part of the database：
If you have questions about this article or want further access to the TEJ Database, feel free to leave a comment or email us.
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