22 February 2019

Green and Social Together: Nudging Sustainability Bonds in the Right Direction

Christa Clapp, CICERO Shades of Green Ltd. and Laurin Wuennenberg, International Institute for Sustainable Development (IISD)

Partnered Content

Laurin Wuennenberg, International Institute for Sustainable Development (IISD)Sustainability bonds are the newest trend to watch in the labelled bond market. In 2018, sustainability bonds and sustainability-linked loans reached record levels. Sustainability-labelled debt financing constitutes approximately 20% of the total green/social/ sustainable debt financing market valued at $247 billion and are one of the areas experiencing the fastest growth.1

But are sustainability bonds the best solution for achieving Sustainable Development Goals? Or are they an opportunity for issuers to selectively align to only the SDGs that suit them, for example considering only specific social aims while causing negative environmental impacts, or vice versa? Only if the sustainable criteria are viewed in connection with each other, and not in isolation, can sustainability bonds avoid unintended negative consequences.

Green + social = sustainable?

Sustainability bonds are not as simple as just tagging the Sustainable Development Goals (SDGs) to project categories that yield some green or social value. How we interpret and apply the International Capital Market Association (ICMA) Sustainability Bond Guidelines should protect against green projects with potentially harmful social impacts, and vice versa: that social projects should not have negative environmental impacts.

Imagine a new housing development, designed to provide affordable housing to lower-income families, a great example of a social project with multiple positive social benefits such as improved urban livelihoods, better productivity of workforce, reduced crime rates, inclusiveness and social mixing. But now imagine it built with poor insulation, energy-inefficient equipment and supplied by electricity from fossil fuels, contributing to increased greenhouse gas emissions. This housing example highlights why we need to review against green criteria and social criteria for all project categories – under a sustainability bond framework the low income housing could be categorized as a social project. However, if the green criteria are not also examined, the project category becomes a loophole whereby issuers can ignore the environmental consequences. According to the IEA, the efficiency of all buildings needs to improve by 30% by 2025 to keep pace with increased building size and energy demand to be aligned with the Paris Agreement targets2. Examining both green and social aspects together requires issuers to do their homework upfront – but this is necessary if we want to push sustainability bonds in the right direction.

Christa Clapp, CICERO Shades of Green LtdThe ICMA Sustainability Bond Guidelines (June 2018) highlight that sustainability bonds should be aligned to both the Green Bond Principles and the Social Bond Principles: “Sustainability Bonds are aligned with the four core components of both the GBP and SBP with the former being especially relevant to underlying Green Projects and the latter to underlying Social Projects.” According to ICMA´s Guidelines, Sustainability Bond Frameworks will contain both green and social project categories but there is no suggestion to establish a new third category for sustainable projects. However, this begs the question to what extent should green projects be subject to a social review, and social projects be subject to a green review?

To avoid ‘cherry-picking’ of only the Sustainable Development Goals (SDGs) that are convenient for showcasing a positive outcome, our interpretation of the Sustainability Bond Guidelines is one that is integrated. Green projects should comply with widely accepted social standards and contribute to social cohesion, while social projects should meet environmental standards and not oppose key environmental objectives such as climate change mitigation and adaptation. In times of the climate crisis, biodiversity loss, rising inequalities, diminishing social cohesion in societies, political turbulences, and the 4th industrial revolution and its transformational impacts on our lives and workspace, there is a strong need for truly sustainable projects and mechanisms that steer capital towards such projects. Indeed, the integrated approach distinguishes Sustainability Bonds from others and justifies its space in the bond market.

The emergence of Sustainability Bonds should encourage issuers to find synergies and efficiency gains between social and environmental objectives and demonstrate to the market their capabilities and their ambition to identify and finance sustainable projects, cope with potential trade-offs and measure the impacts. Transparent and integrated review approaches to assess Sustainability Bond Frameworks are key for independently confirming the issuer´s capabilities towards the market. Combining both green and social review together provides a holistic review of Sustainability Bond Frameworks and their relationship with the SDGs.

Best practice case study: ADBC Framework for Green and Sustainability Bonds

The Agricultural and Development Bank of China (ADBC) is one of the top green bond issuers in China. Its debut offshore EUR green bond was issued under the ADBC Green and Sustainability Bond Framework, which provides an example of best practice in both green and social considerations. As a policy bank, ADBC supports China’s policies through financing focused on eliminating poverty at the regional level by 2020 and revitalizing rural areas. ADBC’s framework supports both green and sustainability bonds.3 Their green bonds can finance sustainable water and wastewater management, renewable energy, and environmentally sustainable management of living natural resources and land-use. The sustainability bonds can fund the above green bond project categories, in addition to affordable housing, affordable basic infrastructure such as water networks and basic medical facilities as well as essential services such as medical and educational services.

For the ADBC Second Opinion, the first sustainability bond to be reviewed jointly by CICERO and IISD, we combined our Shades of Green methodology with assessment on social issues to raise the bar for sustainability bond second opinions. Both institutions saw the benefit of collaborating and combing their expertise for the review of sustainability bonds, given the critical role that financing of sustainable infrastructure will play in achieving SDGs and climate targets.

The Second Opinion by CICERO and IISD rated ADBC’s Sustainability Bond Framework Medium Green overall, noting that the Sustainability Bond Framework includes a broad range of project categories that generally support sustainable development. (The Green Bond Framework, which only contains green projects, was awarded an overall Dark Green shading from CICERO.) Example project categories and elements of the green and social analysis are shown in the table below. Sustainable water and wastewater management was assessed as a Dark Green category with some cautionary notes on reservoirs and potential health impacts. Affordable housing projects were assessed as a Light Green category based on limited energy efficiency improvements, but well aligned with SDGs 1 focused on no poverty and 11 focused on sustainable cities and communities.

Table 1:  Project examples from ADBC Second Opinion <sup><a href="/content/the-green-bond-hub/green-and-social-together-nudging-sustainability-bonds-in-the-right-direction.html#four">4</a></sup>

For the green assessment, the Shades of Green methodology provided a framing to grade project categories Dark Green, Medium Green or Light Green, reflecting the climate and environmental ambitions of the bonds and the robustness of the governance structure of the Green and Sustainability Bond Framework. The grading is based on a broad qualitative assessment of each project type, according to what extent it contributes to building a low-carbon and climate resilient society. The shading methodology also aims at providing transparency to investors when comparing green bond frameworks exposure to climate risks. A dark green project is less exposed to climate risks than a lighter green investment. Project categories with only social targets might be rated ‘neutral’ signifying that these projects most likely will have an insignificant environmental impact.

Layering on top of the Shades of Green considerations, IISD analyzed the potential social impacts and risks of eligible green and social asset categories, based on IISD’s extensive experience in sustainable infrastructure assessments and best practice guidelines and safeguards, such as the Environmental and Social Performance Standards of the International Finance Corporation. The reference framework of the SDGs was chosen for analyzing the benefits of social asset categories. SDGs are increasingly accepted and applied within the impact investment community, and many countries are working actively on implementing the SDGs. In addition, ICMA recently published a high-level mapping on the alignment between the SDGs and green/social asset categories of Green/Social/Sustainability Bond Frameworks. The assessment covers the bond issuer´s capacity for anticipating and assessing adverse social risks when selecting eligible green and social projects. It is also reviewed whether the issuer has implemented policies that require project beneficiaries to have systems in place to avoid, reduce or minimize adverse social impacts.

Making Sustainability Bonds a meaningful trend

Given the continued spotlight on the SDGs, we expect that the market for sustainability bonds will continue to grow. We hope that this doesn’t crowd out the useful work in the green bond space, but rather complements it to accommodate issuers and investors that want to integrate social aspects with green aspects. If green and social dimensions are integrated, sustainability bonds have the possibility to become something meaningful – where environmental performance and social cohesion have a symbiotic relationship. Enhanced transparency for sustainability bonds, and also social and green bonds, can inform investors on how social projects align with green impacts and on how green projects align with social objectives.


  1. BNEF, 2019 (https://www.bloomberg.com/professional/blog/sustainable-debtmarket-sees-record-activity-2018/)
  2. IEA, 2017 (https://www.iea.org/etp/tracking2017/ )
  3. ADBC's Green and Sustainability Bond Framework: http://www.adbc.com.cn/en/n1061/c26588/content.html
  4. Access full ADBC opinion here: https://cicero.oslo.no/file/1238/adbc_2018_ver2.pdf
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