Are global GSS bonds sustainable?

Global green, social sustainability (GSS) bonds may not be stable enough yet. The bonds where proceeds will be exclusively applied to finance or re-finance a combination of both green and social projects are likely face stricter monitoring and requirements from institutional investors, while benefits of holding the debts are unclear.

With growing interest in environment, social and governance (ESG) after the COVID-19 breakout, sales of the GSS bonds including sustainability-linked debts mounted to $606.7 billion in the first seven months of the year, already exceeding $474.7 billion in the entire 2020, according to the Korea Center for International Finance (KCIF) on Aug. 24.

Issuances of the sustainability-linked bonds quick grew this year with the debt sales up to $68.8 billion in the January-July period from $10 billion in the whole of last year. The sustainability-linked debts accounted for about 11% in the global GSS bonds, sharply up from 2%. Issuers of the bonds are able to use the proceeds for general operations or repayment of existing debts as long as the bonds are linked to the issuers’ goal to reduce carbon emissions.

Global GSS bonds have been benefiting from rising demand that cut borrowing costs. Their spreads, dubbed the ‘greenium,’ were usually narrower than differentials of conventional bonds. In Germany, the greenium for a five-year GSS bond was a 0.07 percentage point and the spread for a 10-year debt was a 0.04 percentage point, for example.

The KCIF pointed ESG issues became a new investment instruction in the bond markets, tightening guidelines. Investors required stricter conditions on the GSS bonds on increasing ‘greenwashing’, the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.

“The markets are still unstable compared to conventional bond markets, although trading volumes in the secondary market will improve in line with increasing issues,” said KCIF’s head of capital market Kim Yunkyoung. “The European Union’s classification system that is still complex and lacking details could confuse issuers.”

Potential changes in the system may get rid of the status of some green bonds and restrict on sales of the GSS bonds.

Write to Eun-Jung Kim at kej@hankyung.com
Jongwoo Cheon edited this article.