Not only green bonds, new green finance instruments

Green bond issuances from the beginning of 2024 to the end of November reached USD 629 billion, according to Climate Bonds Initiatives' findings. January and May, with $81bn and $86bn respectively, were the months with the largest issuance volumes. But it is not only environment-related bonds that attract the attention of companies and governments. According to data released by Nuveen, by 2024, there will be more than USD 1 trillion in bond issues defined as green, social and sustainable (Gss). This is a mature market, with Europe playing a predominant role, with public green bond issues from Italy, France and Germany. There is also growth in Asia in this area of financial instruments, with Australia issuing its first green bond in June this year. China remains the largest issuer in the region, followed by South Korea and Japan.

The GSS market is also about to witness a real evolution of sustainable forms of financing, with the consolidation of solutions such as debt-for-nature swaps. Driving its development may be the need of many developing countries to manage their debt and the increasingly severe consequences of climate change.

But what are these new financial instruments? "With debt-for-nature swaps a country exchanges part of its debt for a commitment to implement projects that have a positive environmental impact. The success of these projects depends not only on the environmental impact, but also on the social and economic benefits," explains Jessica Zarzycki, portfolio manager at Nuveen. "This is an emerging area of climate finance, so some investors do not understand its purpose and potential. Criticism of debt-for-nature swaps or debt-for-climate swaps seems to ignore that there are not only environmental benefits, but also social ones. Debt relief is linked to economic opportunities. The whole transaction represents an opportunity to provide impact capital that not only benefits the environment, but also has positive effects on society'.

Structuring a deal with projects that not only have a positive impact on the environment, but also benefit the community and the economy implies that each transaction will be different and that it takes several months to structure it properly, Nuveen's portfolio manager emphasises: 'Programmes must be designed to last through multiple administrations. We expect this type of investment to continue to grow, but we expect few transactions per year. Debt-for-nature swaps often involve third-party certification or oversight to ensure that environmental commitments are met and that funds are used effectively for conservation purposes. At Nuveen, we have developed a comprehensive framework for impact in fixed income that is structured around four direct and measurable impact themes: affordable housing, community and economic development, renewable energy and climate change, and natural resources."

There is a wide range of new opportunities emerging in the fixed income market: blue and orange bonds, debt-for-nature swaps, carbon credit transactions.