The main sustainable financial instruments

The sustainable financial instruments available on the market can be grouped into three categories: bonds, shares, or units in investment funds.

Among the most widespread sustainable financial instruments are green, social, or sustainability bonds.

Green bonds are specifically issued to raise funds for projects that have a positive environmental impact. Issuers are required to provide a report detailing the actual use of the funds. For example, through the issuance of Green BTPs (Green Treasury Bonds), the Italian government has financed transport sector initiatives aimed at transitioning to more environmentally friendly mobility, such as the expansion and improvement of rail infrastructure and metro lines.

The issuance of green bonds has increased significantly over the years: in the euro area, it rose from around 300 billion euros at the beginning of 2021 to over 900 billion in the early months of 2024 (ECB chart). More broadly, sustainable bonds account for over 6 per cent of all bonds issued in the euro area.

Social bonds, on the other hand, are aimed at financing social initiatives (e.g., social infrastructure such as schools, affordable housing, public parks, etc.); sustainability bonds finance projects that combine both social and environmental objectives.

In addition to green bonds, companies or governments can also issue bonds whose proceeds are not allocated to specific investment projects but are instead linked to achieving broader environmental targets. These are known as sustainability-linked bonds. They are less common, as it is challenging to define reliable indicators to measure whether the stated objectives are being met. For example, a company might issue a bond to finance a specific reduction in its greenhouse gas emissions. The bond's return will depend on whether the targets are achieved. If the company fails to meet them, it must pay a penalty to the investor.

Shares in companies with a strong ESG (Environmental, Social, and Governance) rating rating in terms of sustainability can also be considered sustainable financial instruments.

Other sustainable or green financial products include units in investment investment funds with sustainability features.

Funds with sustainability characteristics are those that select financial assets based on strategies that consider environmental or social objectives, in addition to traditional financial goals – for example, by selecting securities that fund projects with a positive environmental or climate impact, such as green bonds or shares in companies with high social sustainability ratings.

In general, a bond is a debt instrument issued by a company, a government, a public authority, or a supranational organisation to raise funds. It gives the investor who purchases it the right to receive, at maturity, the repayment of the capital invested and interest payments (known as coupons).

Investment funds are instruments managed by companies that pool savers' money to invest in financial assets (shares, bonds, government securities, etc.) as a single portfolio, using strategies aimed at reducing risk. These funds are divided into units which are subscribed to by investors and confer equal rights.

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