The world is transforming to become more sustainable. Businesses are struggling to make their bottom line, while trying to limit their impact on the environment. Governments are scrambling to restructure their archaic institutions and facilities to be friendlier to people and the planet. But achieving many of these goals is neither easy nor cheap. For this reason, not long ago, a financing market opened up, which is now huge, through so-called SRI (sustainable and responsible investment) bonds or simply sustainable bonds.
This market took off in 2017 and generated so much demand that in just two years it was already $122 billion in size, according to BloombergNef. Although, this growth is increasing as companies and public institutions request more resources for their sustainable and renewable projects. Thus, if already in 2021 25% of new corporate bond issues, debt issued by companies, with investment grade were sustainable debt, in 2022 that figure was close to 33%.
If you want to know more about this fast-growing market and how it fits into your investments and portfolios, read on. Firstly, let’s define what an SRI bond is and how it differs from conventional bonds.
What are ISR bonds?
SRI bonds are a type of debt issued by public or private institutions (companies) to finance or refinance ecological and social projects or activities. In order for issuers, ranging from companies to governments or municipalities, to validate that their debt is SRI, the projects they finance must follow a set of guidelines set out in the ICMA (International Capital Market Association) Social Bond Principles (SBP), in the case of social bonds, or the Green Bond Principles (GBP), in the case of green bonds.
Types of ISR bonds
SRI bonds are not only composed of the two broad categories of sustainable debt: social and green bonds, but can also take other forms. In particular, there is one that has gained a lot of momentum in recent years: sustainability-linked bonds.
Technically, they are similar to the aforementioned bonds; however, this type of debt has an important peculiarity: its financial characteristics change depending on whether the issuer achieves certain sustainability objectives, to which it has previously committed itself. The particularity is that by achieving these objectives, which are measured through certain key performance indicators (KPIs), the issuer manages to reduce the cost of the debt. However, if it fails to do so, interest rates will rise.
The key to this type of bond is that it is a huge guarantee for investors, as they are either assured that they will meet the agreed targets or the remuneration increases. It also makes companies or governments work harder to make real progress on sustainability.
Main advantages of ISR bonds
Among the advantages that have made SRI bonds a must-have product for investors are the following:
- Exponential growth: as more companies and public entities join the sustainable objectives, more projects need to be financed. This is causing the market to grow significantly, which opens up many possibilities for investors, generating a virtuous circle. In fact, in recent months, autonomous communities such as Madrid and Castilla y León have been joining the bond market.
- Portfolio diversification: as the market grows, as we have seen, investment possibilities soar, and this allows investors to bet on different projects that help diversify their portfolio. This is not only because there are more and more different projects, but also because there are more issuers and from different geographical origins.
- Markets in continuous innovation: the sustainable projects to which the money from sustainable funds comes from are incredibly varied and are no longer limited to seeding the mountains with solar panels or windmills. In fact, a significant part of the funding goes to pioneering projects, such as CO2 capture, which are already the future of sustainability. By investing in this type of debt, investors not only generate high returns, but also have a greater impact on society.
- Transparency and accountability: one of the characteristics most valued by investors is that any financing requires scrupulous transparency from the outset. So, whether they are green or social bonds, before raising the funds, issuers must issue a detailed report about the project and what each euro will be used for. But it doesn’t end there, as the reports must continue to be made every year to show both that the initial objectives are being met and where and how the money raised is being used.
- The link between profitability and social benefit: the most outstanding advantage is that it offers a link between getting a high return for our money and the conviction that we are making the world a better place. Moreover, it is not only about the environment, but also about helping people on the social side.
inbestMe, the perfect platform for investing in SRI bonds
When it comes to investing in this type of debt products, you have several options. One of the most advantageous is to use investment platforms such as inbestMe. The company is a roboadvisor or automated investment manager, which has a long experience in Spain and has many awards for its performance. Within its huge range of products, we can find SRI bonds, so that our portfolio will benefit.
In addition, it has very competitive costs and always with the most profitable products on the market, thanks to the guarantee offered by the team of experts behind the model with which inbestMe works. Therefore, if you also want to benefit from the advantages of being part of the platform and incorporate this type of funds to your portfolio, do not hesitate and click here.
