What are Green, Social and Sustainability (GSS) Bonds?

Purpose: Issued to fund projects/outcomes with environmental benefits.

Context: There are two types of green bonds:

• Labeled—Issues that meet specific industry conventions and/or include second party opinions (SPOs)
• Unlabeled—Proceeds used for climate-aligned projects and initiatives but issued without green bond designation mentioned in offering docs; these are often deals too small to make SPO economically viable

Green bonds have been issued by sovereigns, supranationals, agencies, corporates, ABS, CMBS, and taxable municipals. A significant amount of utility cap ex for renewable energy generation and infrastructure investment is funded through the corporate green bond market.

Nuveen notes: Green bonds typically align with Nuveen’s two environmental impact themes: Renewable energy and climate change; Natural resources. Lead portfolio manager Steve Liberatore was a member of ICMA’s Executive Committee that wrote the Green Bond Principles (GBP).

Purpose: Issued to fund projects/outcomes with societal benefits.

Context: Social use of proceeds and intended outcomes are widely varied and can be more challenging to measure than green outcomes. Measurement can be difficult due to the bespoken nature of projects or the length of time required for a community or constituent base to realize the benefits of education, vocational training, access to health care or consistent provision of safe/healthy food and water. Issuance expanded in the 2020-21 period given COVID relief efforts that spanned both health/medicine and socioeconomic aid outcomes. More recently, sovereigns have issued bonds to finance education, healthcare, and other initiatives.

Nuveen notes: Social bonds typically align with two Nuveen impact themes: Affordable housing; Community and economic development. Nuveen considers GNMA MBS to be impact securities given the GSE’s explicit mission to support low-cost financing associated with federal housing programs. We don’t consider FNMA or FHLMC MBS to be impact given the broader mission of those agency issuers.

Purpose: Issued to support a combination of social and environmental projects.

Context: As the market evolves, more issuers are combining societal and environmental outcomes. Sustainability bond programs are increasingly naming social, green, climate-aligned, and energy efficiency projects and programs as eligible use of proceeds. Examples include: affordable housing deals that also have energy efficiency or renewable energy related goals; residential solar ABS with collateral pools aimed at lower income borrowers; bank issuers moving from green or social frameworks to sustainability frameworks.

Nuveen notes: Nuveen classifies each impact security under a single theme, based on the outcome(s) we view as primary or predominant. Yet we acknowledge that the lines are increasingly blurring. In the end, the environment impacts society, which impacts the economy.

Purpose: Issued to fund projects/outcomes supporting ocean and marine habitat conservation and restoration have historically been called blue bonds.

Context: Nature-based or nature-positive investments can refer to “blue” (oceans), “green” (terrestrial/forests), or wildlife/biodiversity outcomes. In recent years, debt for nature swaps and related blended finance transactions have funded marine conservation and sustainable fishing outcomes. These deals help reduce the debt burden of emerging market countries with significant marine-based natural resources, while creating a new funding source for the impact outcomes. Debt for nature swaps can also be used to finance non-marine projects and outcomes, so the terms are not wholly interchangeable.

Nuveen notes: We tend to view projects for safe drinking water and water/sewer infrastructure to be sustainability bonds, while reserving the blue bond classification for conservation, preservation and other marine-based outcomes.

Purpose: Issued to support gender-inclusive financing and mobilize capital to prioritize gender equality and women’s empowerment in ways that value women and girls as solutions to a more resilient future.

Context: Orange bonds take their name from the icon associated with SDG 5: Gender equality. The Orange Bond Initiative (OBI) was organized by Singapore-based Impact Investment Exchange (IIX) to provide support and momentum for gender equality impact securities. The Orange Bond Principles were published in October 2022.

Nuveen notes: Nuveen is a founding signatory and steering committee member of OBI, a direct result of our engagement with IIX on multiple issuances of the Women’s Livelihood Bond (WLB) series.

Purpose: General obligation or general corporate debt instruments with financial/structural triggers based on achieving sustainability metrics over a specified timeframe. Typically, there is a coupon step up associated with an issuer missing its enterprise sustainability target(s).

Context: The issuer retains full discretion over how the capital is allocated. Issuance has decline

Nuveen notes: We do not consider SLBs to be impact securities, since they avoid disclosure of specific use of proceeds and measurement is at the enterprise or issuer level, rather than project-specific KPIs. We prefer a recent innovation, outcome bonds, which align investor objectives with success of the project financed by the debt issuance. Instead of a financial penalty for missing a target, these outcome-linked bonds offered a higher return if the underlying project is successful.