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Green & Social Impact Bonds and Environmental Swaps

By Harry Merrison, Investment Manager at Kingswood

The rise of green bonds coincides with increasing investor appetite to incorporate environmental, social and governance (ESG) factors in to their portfolios. With total assets linked to sustainable investment strategies now exceeding $30 trillion globally, it is unsurprising that non-equity asset classes are migrating from interesting niche to pioneering mainstay. In this commentary, we will examine green and social impact bonds, environmental swaps and green bond principles under the microscope.

Green Project Bond 

Green Project Bond proceeds are used to fund environmentally friendly projects such as clean water infrastructure, renewable energy and pollution prevention and control. Increasingly popular with responsible private investors, charities and institutions the value of annual issuances has climbed from $2.6bn in 2012 to a predicted $200bn by the end of 2019.

Green Revenue Bonds 

A Green Revenue Bond finances a specific income generating municipal project, such as a toll bridge. Generally, regarded as more risky due to the single revenue stream, the investor is compensated with a higher yield paid back over a longer term time horizon.

Green Securitised Bonds 

Green Securitised Bonds are collaterised by one or more sustainable assets. Securitisation is the fastest growing product in green finance and the Organisation for Economic Co-operation and Development (OECD) has estimated that the issuance of green ABSs could reach $380bn annually by 2035.

Green Bond Principles 

The Green Bond Principles (GBP), issued by the International Capital Market Association (ICMA), is a set of guidelines that recommends transparency and disclosure and promotes integrity for green bond issuance. There are four core components:

Use of proceeds
Process for Project Evaluation and Selection
Management of Proceeds

Investing in Green Bonds 

Green bonds should not be considered niche – The European Investment Bank issued the first green bond in 2007. Since then the World Bank and numerous others have followed in their steps. There are numerous specialised funds managed by global powerhouses such as Blackrock, Axa and Allianz. Investors can quantify success against specialist green bond indices such as the S&P Green Bond index, a multi-currency benchmark that includes multilateral, government and corporate issuances. Though, not all success is quantifiable.

Social Impact Bonds 

A Social Impact Bond (SIB) is a contract with a public sector or government authority with the objective of delivering tangibly enhanced social outcomes. Whilst ‘bond’ is in the title, this should not be confused with the conventional variety, as no income or principal will be received should objectives fail to be met. Consequently, SIBs should be considered quite a lot more risky than Green Bonds though would not be affected by reinvestment risk, market risk or interest rate risk.

The SIBs raison d’être can be mapped against the UN’s 17 Sustainable Development Goals (SDGs).

Environmental Swaps 

Environmental Swaps are financial transactions whereby indebted nations can ameliorate a portion of their debt in order to promote conservation. These are sometimes referred to as debt-for-nature swaps and have been in existence since the late 1980s.


The benefits are both moral as well as monetary as investors can earn 30% income tax relief on investments up to £1m at the same time as driving positive change and diversifying their portfolio. Returns are typically derived from government sponsored activities which also provides holders a level of protection. Liquidity risk is currently a drawback for some investors, though with the number of Green Bonds ballooning, liquidity is set to ease.

Finally, the definition of ‘green’ is clearly open to interpretation; the Green Bond Principles have sought to address this with some standard guidelines – nonetheless, always look under the bonnet to ensure the mandate aligns with your own morals.