Social, Sustainability, and Sustainability-Linked Bonds

The rise of sustainable investing in fixed-income markets has led to a variety of special types of bonds. In addition to green bonds that are predominantly used to provide capital for the energy transition, recently also social, sustainability, and sustainability-linked bonds have appeared in financial markets. We explain the differences between each of these types of bonds, the developments and composition of the markets. Since yield differences between returns on sustainable and conventional bonds are small and correlations high, the risk and return profile of the portfolio is unlikely to change much when certain conventional bonds are replaced with sustainable bonds with similar characteristics, while portfolio sustainability may improve. The lack of clear rules and standardization for these new types of bonds risks leading to greenwashing by bond issuers. Consequently, investors aiming to avoid greenwashed portfolios are required to set up their own sustainability frameworks