Sustainable bond

Recycle, don't waste, reuse… and invest? Yes, you can help protect the environment through your investment choices, thanks to financial products specifically designed for this purpose. We're talking about green bonds. But you can also contribute to the well-being of society, not just the ecosystem, through other types of bonds – such as social bonds, or more broadly through sustainability bonds and sustainability-linked bonds. Let's explore these sustainable finance instruments.

What is a green bond?

A green bond is a financial instrument similar to traditional bonds, with one key difference: the issuer uses the money raised exclusively to finance environmentally sustainable projects, such as building a renewable energy plant or reforesting an area. Otherwise, it functions like a regular bond – the issuer must repay the face or redemption value at maturity and pay interest.

The first green bond was issued in 2007 by the European Investment Bank (EIB), the European Union's institution that finances development projects, including those related to climate and the environment. Since then, more and more public entities and companies around the world have issued green bonds, for example to fund sustainable water and waste management or pollution reduction.

Since 2021, the Italian government has also been issuing a green bond, the BTP Green. It's one way in which Italy contributes to achieving the 2030 Sustainable Development Goals endorsed by UN member states.

Risks to watch out for

When buying a green bond, you're exposed not only to the same financial risks as traditional bonds but also to the risk of greenwashing – the misleading practice of presenting products or activities as environmentally sustainable when they are not, deceiving investors concerned with sustainability. This risk is worsened by the fact that there's currently no single definition of a “green investment”: what truly qualifies as a “green” project is open to interpretation.

Over time, efforts have been made to establish standards and guidelines to reduce the risk of greenwashing. One example is private standards developed by the International Capital Market Association (ICMA), a global association of banks, intermediaries, and asset managers.

At the end of 2023, the European Union introduced its own standard: anyone wishing to issue “European green bonds” (EuGB) must follow specific rules outlined in a dedicated Regulation. Specifically, each issuer must:

• use proceeds to finance activities aligned with the EU taxonomy, a classification of economic activities deemed compatible with the EU's sustainability goals;
• provide details on the bond's characteristics, including how the funds will be used and the expected environmental impact, through an information sheet;
• publish annual reports on how the funds raised have been used, until the entire amount has been invested;
• employ external auditors to verify the information.

In both cases, these are voluntary standards: before investing, you should carefully read the financial instrument's prospectus.

Other types of sustainable bonds

In addition to green bonds, there are other bonds that adhere to sustainability criteria. Here are a few examples:

• social bonds: these bonds finance projects that produce positive social changes, such as building hospitals or supporting employment. An example is SURE (Support to mitigate Unemployment Risks in an Emergency), created to reduce unemployment risks caused by the COVID-19 pandemic in EU countries.
• sustainability bonds: these finance both environmental and social projects.
• sustainability-linked bonds: these support general sustainability objectives set by the issuer, such as limiting carbon dioxide emissions to a certain number of tons per year. Unlike the previous types of bonds, what matters here is not the use of the proceeds but the issuer's improvement in environmental and social performance, measured through Key Performance Indicators (KPIs).