Remember when the first smartphones came out? Save for a few ‘early adopters’ always keen to embrace emerging technology, many people were skeptical. They had few apps, wi-fi connections were patchy and data costs prohibitive. It was difficult to know what phone to buy, operator to use and contract to sign up for, amid a plethora of options with obscure terms and conditions.
Despite these drawbacks, smartphones slowly made their way through groups of influencers who made them fashionable. Eventually, offerings became clearer alongside a rapidly developing ecosystem of apps, free wi-fi, inclusive data and cross-border agreements. Today, smartphones are ubiquitous, we each have our preferences, and most know how to hunt for the best deal.
The universe of sustainable bonds is developing in a similar way. After years where only green bonds were on offer, adopted by few investors and looked on with suspicion by many, recent years have seen an acceleration in demand and supply. In 2020, the pandemic stripped companies and investors of the last veils they could hide behind to justify inaction on both climate change and social inequality. As a result, sustainable bonds are booming.
It feels as though we are in the first phases of democratization of the market. Just as we once struggled to understand smartphone offerings, investors are grappling with the best way to support what the European Union has called ‘the just transition’ to combat global warming and inequality. The learning curve is steep before sustainable bonds can become mainstream and raises numerous questions. Should green bonds only be for green industries? What are the pros and cons of a sustainability bond compared with a sustainability-linked bond? Are climate transition bonds necessary or redundant? And, crucially, how can investors mitigate risks of greenwashing to ensure their money makes a difference?