Green bonds fund environmental projects. Social bonds fund social projects. Sustainability bonds fund a mix of both types of projects. But which sectors benefit most by applying those labels to the finance they raise? Is being green more valuable to an oil company or a car firm?

Those labels say nothing about the quality of projects being funded. And while sustainability-linked bonds do not fund projects – instead they penalise the issuer for failing to meet pre-agreed environmental or social targets – that does not tell us about the quality of the target. But investors are assessing the quality of labelled bonds and rejecting those that do not meet their standards.

We think investor demand is thus a proxy for quality. True, investors may be buying a particular issue to diversify their holdings, but if investors are being selective when buying labelled bonds, how oversubscribed an issue is will reflect the demand.

Analysing issues since 2014, we find that the median green bond is 3.3 times oversubscribed, the median sustainability bond could have been sold 3.5 times over, and the oversubscription for the median sustainability-linked bond was 3.0 times.

In contrast, the median non-labelled bond was less in demand, oversubscribed just 2.7 times. However, the median social-bond oversubscription was even lower, just 2.4 times, suggesting that these issues from companies are not very popular.

Those results are reflected in the prices that labelled bonds command compared with other issues.

Various organisations offer ‘second party opinions’ on whether bonds warrant labels such as green. Some 97 per cent of the green, social and sustainability bonds in our sample had second-party opinions, but only 11 per cent of sustainability-linked bonds have them – though those that do benefit from higher demand.

But looking at the issuers, we see that the most popular sectors for labelled bonds have been Personal & Household Goods, Industrial Goods & Services, Telecommunications, Basic Resources, and Autos.

Utilities have been relatively less popular – perhaps because they were early issuers of green bonds when the product was less in demand, or because labelled bonds already comprise 31 per cent of bonds in the sector and investors want to diversify. Or the volume of labelled bonds may exceed the ‘good’ projects available.

That may apply too to banks, where labelled bonds make up 11 per cent of all bonds in the sector.

At the lower end of demand are Oil & Gas, Construction & Materials and Real Estate. Carbon emissions by the Oil & Gas sector are very high, of course, and decarbonisation will be challenging; Construction & Materials is also carbon-intensive and the technology required to decarbonise is not yet mature.

As for Real Estate, most of the sector’s green bonds fund green buildings and energy-efficiency projects, but one study found these account for only 6.8 per cent of the carbon emissions reduction achieved despite making up 52 per cent of the sample. In other words, green buildings had a relatively low impact in terms of reducing carbon emissions.


First published 12th October 2021.

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