As social and green bond issuance soars around the world, measuring the sustainability performance over the life of a bond is growing in importance, and complexity.

While Europe leads the way in measuring sustainability, the Asia-Pacific region is fast catching up, says Rebecca Palmer, Director of Sustainable Finance at ICE.

“There is a lot of regulation coming out in the region and it’s hard to generalise, but Japan is following more of a guidance-based approach – with less regulation, focused on best practice,” she says. “Singapore has also issued guidelines, while Hong Kong has more of a regulatory bent, and New Zealand is the first country to mandate climate related financial disclosures.”

Now, bond issuers and investors are taking a more active approach to ensure projects and investments are achieving sustainable goals. Similarly, investors want to measure their contribution to those goals through their funding. Critical to the success of any approach is measurement, Palmer says. “Investors are looking at bonds they’ve invested in and asking what exactly these bonds are funding, project wise,” she notes. “Increasingly they’re asking about sustainability profiles during the project development.”

According to Deutsche Bank’s Director for ESG in Asia Pacific, Dr. Kalpana Seethepalli, “not knowing what metric to report on to substantiate impact is no longer a justifiable excuse for most bond issuers.” Dr. Seethepalli leads the bank’s impact measurement and reporting function for transactions across all its businesses in APAC. “Various global organizations such as the International Sustainability Standards Board have developed reporting metrics for almost all industries and sectors, which are now globally accepted as material for substantiating impact,” she says. “Comparable data can not only assist investors in identifying well-structured ESG bonds, but also help them understand which of those well-structured bonds are delivering the promised impact.”

At the point of issuance, an issuer will explain the purpose of the bond and the project being funded.

The issuer should then be providing reports on the allocation of those finances. Normally money raised is drip fed into projects which the issuer then reports on. But sometimes the actual target of the spend, and whether it’s achieving its sustainability goal, remains unclear.

Palmer uses the example of issuing bonds to build a wind farm over a period of three years. Here, there may be some harmful environmental impacts during the building process, so that the positive impact of renewable energy is not realised until the wind farm is operational. Sometimes investors don’t get these insights, as issuers may not be disclosing comparable, measurable metrics.

This challenge could partly be solved by the Harmonised Framework for Impact Reporting, produced by the International Capital Market Association (ICMA) together with the Technical Working Group. These principles were established in 2015 and provide the guidelines for impact reporting formats and metrics per sector and project category.

In the wind farm example, the project is expected to replace energy consumption off the grid, which is fossil-fuel generated. As the project comes online, companies will be able to demonstrate reduction of their Scope 2 greenhouse gas emissions – those released into the atmosphere by the indirect consumption of energy – and renewable energy consumption will rise.

Measurement is the key to both ensuring a sustainable bond portfolio for investors and driving change among issuers. This is where the ICE Impact Bonds Data can help. The dataset, which is sourced from prospectuses, reports and other sources, has ~11,000 different bond types in its database, issued by corporates, supranationals1 and governments. The breadth and depth of this data has allowed ICE to start developing an ‘impact per dollar’ metric, by examining the disclosed information across a set of bonds.

“For example, if a new bond is valued at $100 million and is used in a project that reduces greenhouse gas emissions by 500 metric tons, then you can calculate what $1 of investment can buy in terms of metric ton reduction,” Palmer says. “This metric allows investors to better measure and compare the sustainability performance of a bond portfolio.”

The benefit of this metric is clear: an investor can aggregate the per dollar sustainability benefits across a portfolio and the contribution they are making. Investors can rank bonds by the value they offer in terms of dollar impact on greenhouse gas emissions savings. They can also search for bonds that meet their own KPIs and rank them in terms of performance.

But this is only part of the solution, as it doesn’t address investor demand for information about the longer-term intentions and strategies of an issuer’s entire operation.

“Investors want to step back and understand what the issuer is doing more broadly,” Palmer says.

“And that’s something people use ICE for – because we can provide that link with the issuer, or their parents’ decarbonisation plans and sustainability disclosures. Investors want to know if a company on the one hand, is undertaking a shiny, new decarbonisation project, but behind the scenes, is ploughing capital expenditure into coal mines.”

1 Supranational entities are those not domiciled in any single country.