Sustainability Bonds Open the Door to New Initiatives and New Investors

In 2019, our client Millicom, an international telecommunications company, became the first company to issue a Sustainability Bond in Latin America. Last month Millicom issued its annual integrated report outlining its financial, social and environmental achievements. Despite the challenges of the pandemic, the company has made many strides in moving toward its corporate responsibility goals over the past year. In part, those advances are due to the investments the company was able to make as a result of $214 million in funds raised through the Sustainability Bond. Millicom just recently reported on the results of the $214 million in funds raised through the bond and we thought this was a good opportunity to review the win-win projects this trending finance tool is making possible.

What are Sustainability Bonds?

A Sustainability Bond is like a regular bond, a vehicle to raise capital, except that the issuer promises to use the money to finance green or social equity-related projects. The term Sustainability Bond is an umbrella term for Green Bonds (focused on environmental outcomes) and Social Bonds (focused on social outcomes). Often, because of the broad appeal of these endeavors (and because they are sometimes tax-exempt), investors are willing to accept a slightly lower interest rate. 

The International Capital Markets Association (ICMA) defines the principles that these types of bonds must adhere to. According to these guidelines, eligible green and social projects include (but are not limited to) those listed below. 

Eligible Projects for Sustainability Bonds

Corporations are the most frequent issuers of Sustainability Bonds, but government entities and development banks are also major players. Organizations are able to issue Sustainability Bonds on their own, but they often seek the assistance of an outside party to assess the framework to lend it credibility on a wider stage. In 2019, 86% of Green Bond deals received these so-called second-party opinions (SPOs). These outside opinions are an especially important seal of approval given that there have been instances of bonds masquerading as green when they are anything but.

History and Current Trends

The more common and widely used Green Bonds have been around since the World Bank issued the first one in 2008, and their use has grown rapidly since then. Social Bonds are a much newer tool and one in which issuers are encouraged to focus on traditionally underserved target populations. Today some of the world’s best-known brands have issued Green Bonds, including Citigroup, Visa and Mastercard. In December 2020, the global cumulative total of green debt surpassed the milestone of $1 trillion. 

While Social Bonds have historically been dwarfed by Green Bonds (making up only 5% of the total Sustainability Bond issuance in 2019), 2020 saw an unprecedented surge in Social Bonds, fueled in part by the response to the coronavirus pandemic but also by broader concerns about systemic inequities. According to Moody’s, Social Bonds increased by more than a factor of eight between 2019 and 2020, from $17 billion to $141 billion. Moody’s expects to see another huge uptick this year in the issuance of all types of Sustainability Bonds, forecasting 32% growth in 2021. 

This chart shows the rapid growth over time of Sustainability Bonds, which set a new record in 2020 despite the pandemic. 

The Growth in Sustainability Bonds

(Chart from Moody’s Environmental Finance)

Millicom: A Case Study

In 2019, Millicom became the first company to issue a Sustainability Bond in Latin America. They tied their projects to eight of the UN’s Sustainable Development Goals and received a second party opinion validating their approach from Sustainalytics. Millicom’s recent report on the first year of results of its Sustainability Bond projects demonstrates the kind of benefits these bonds enable. Their achievements, which are spread across El Salvador, Paraguay and Bolivia, include: 

• Modernized networks to reduce energy consumption and increase network capacity and performance. A new data center in Bolivia is estimated to use 40% less power than the previous data center.

• Expanded mobile phone networks to underserved populations. Over 78% of the population of these countries now has access to 4G technology.

• Trained women and underserved students, parents and teachers on digital literacy, safety and programming skills to advance socio-economic development and empowerment including training over 100,000 women and over 109,000 teachers in 2020.

The experience with the Sustainability Bond also helped Millicom set the stage for similar, even deeper investments using other financing mechanisms. For example, in 2020 Millicom pursued a $600 million revolving line of credit to advance other CSR projects such as:

• Reducing their environmental footprint through equipment recovery

• Additional supplier training on eco-efficiency, human rights and other issues

• Training teachers to deliver more effective online education to students

The financing of their CSR projects through a Sustainability Bond and now a line of credit ties Millicom’s financial, business and CSR strategies even more closely together and has become an integral part of Millicom’s “purpose” story. 

To Sum Up…

As both institutional and retail investors apply increased pressure on companies to conduct business in an environmentally and socially responsible manner, Sustainability Bonds have emerged as an effective tool to help organizations rise to that challenge. We’ll keep an eye on this trend and look forward to helping more clients tell their integrated sustainability stories that include Sustainability Bonds.