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What do bonds and Trivial Pursuit have in common?

09 November 2023
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Like the questions in the board game Trivial Pursuit, bonds are increasingly being categorised by theme. In its investment strategy, the National Bank is betting big on thematic bonds as such instruments can help mitigate climate change and further the transition to a sustainable economy.

You may know that there are six colour-coded categories of questions in Trivial Pursuit. Which is your favourite? Green, for example, is the colour assigned to Science & Nature. If you pick this category, you may get a question about climate change, a ubiquitous hot-button topic.  

With bonds, too, you can increasingly pick a category, including investments intended to combat climate change. So-called thematic bonds are a fairly new - but nonetheless fast-growing - segment of the market for sustainable investments.

What are thematic bonds?

Thematic bonds, like traditional bonds, are debt securities:

  • issued by a company or government that
  • reach maturity at a date in the future (at which time the principal is repaid)
  • and on which periodic interest, the coupon, is paid.

The major difference with traditional bonds is that an issuer of thematic bonds commits to use the proceeds from the issuance for a sustainable project or objective.

Green bonds

Green bonds are by far the most common type of thematic bond. Green bonds are used to support projects that have a positive impact on the environment or climate change.

For example, the Swedish carmaker Volvo issued a green bond in 2022 to fund the development of the next generation of electric cars. This financing operation allowed Volvo to raise €500 million from investors. Investor interest was extremely high, as evidenced by the fact that the bond was heavily oversubscribed.

Aside from green bonds, it is possible to opt for lesser-known types of thematic bonds. With which categories of bonds can you complete your Trivial Pursuit playing piece?

Are there other colours?

In recent years, sustainability has evolved to encompass much more than just climate change. Themes such as the provision of basic infrastructure, affordable housing, and access to essential services like education and healthcare are gaining importance.

To finance investments to meet these challenges, companies and governments can issue so-called social bonds. Social bonds can be used, for instance, to finance projects that deal with access to essential services (healthcare, education, housing) and food security. At the end of May, for instance, KBC raised €750 million to fund projects in the hospital sector.

However, certain thematic bonds cannot be unequivocally classified as either green or social. In other words, the funds raised can be earmarked for a combination of both green and social purposes. These types of thematic bonds fall into the broad category of sustainability bonds.

In short, unlike in Trivial Pursuit, there’s no elaborate colour code for thematic bonds. That being said, discussion about the precise nature of bonds does arise, just as your Trivial Pursuit opponents have certainly cast doubt on the category of a question: “Come on, that's not a real sports question!”. Sound familiar? Well, investors make the same comments about bonds.  

The eye of the storm

Thematic bonds have seen strong growth, and yet the issuers of these instruments have often found themselves in the eye of the storm. In particular, standards to market a bond as “green” were quite soft in the past, opening the door to what is called greenwashing.

Greenwashing occurs when an issuer of thematic bonds misleads investors as to the supposedly environmentally friendly nature of the activities the proceeds are intended to finance. In other words, upon closer inspection, the funded projects turn out to be much less sustainable than initially suggested.

A solution to greenwashing

To combat greenwashing, a number of organisations have drawn up minimum requirements for green bonds.  For example, the Green Bond Principles of the International Capital Market Association (ICMA) lay down guidelines on the use and management of proceeds, project evaluation and reporting. In addition, a list of examples of eligible projects is provided. If an issuance meets these requirements and the proceeds are used accordingly, the bond can be marketed as a green bond. This is an internationally recognised label that enhances a bond’s credibility.

The lion’s share of the Green Bond Principles is, perhaps unsurprisingly, devoted to projects relating to the impact of climate change. Over the years, though, other themes, such as biodiversity and water management, have gained importance in green bond frameworks.

The emergence of these new themes has attracted new investors and allowed investors in green bonds to diversify their portfolios. As the list of potential green bond issuers and eligible projects grows longer, investors are better able to match sustainable investments to the desired risk appetite. 

The EU taxonomy

The European Union has developed an in-depth taxonomy of qualifying projects for green bond issuers. Specifically, the issuer’s project must be related to at least one of the following six climate and environmental objectives:

  1. Climate change mitigation (measures to limit global warming)
  2. Climate change adaptation
  3. The sustainable use and protection of water and marine resources
  4. The transition to a circular economy
  5. Pollution prevention and control
  6. The protection and restoration of biodiversity and ecosystems

Finally, the project must meet the additional criterion of “do no significant harm”. The purpose of the EU taxonomy is to support the green bond market and in this way help achieve the EU’s 2050 climate targets. It goes without saying that, through its investment policy, the National Bank wishes to contribute as well.

The National Bank as an investor in thematic bonds

The universe of thematic bonds is constantly evolving. However, despite the market’s explosive growth since the European Investment Bank (EIB) issued the first green bond in 2007, thematic bonds still account for a limited share of the total bond market.

Due to growth in the number of green bond (and subsequently thematic bond) offerings, the National Bank has been able to invest an increasing share of its reserves in these assets in recent years. An important milestone was reached in 2021 with the creation of a USD-denominated portfolio made up solely of thematic bonds. By the end of 2022, the National Bank had around €2 billion or 10% of its entire bond portfolio invested in thematic bonds.

The National Bank has already made considerable efforts to integrate climate aspects into its investment policy, but it is clear we are in this process for the long haul. That’s why the Bank, along with many other firms and governments, including the Belgian government, has committed to the long-term goal of becoming net zero by 2050. You can read more on this subject in our Sustainable and Responsible Investment Charter, published last year.  

While achieving this goal will depend on whether firms and governments are able to meet the Paris agreement targets, it is clear that green bonds will have an important role to play. Furthermore, the Bank aims to continue to increase the percentage share of thematic bonds in its bond portfolio. In this way, the Bank will further complete its Trivial Pursuit playing piece and, in the process, become greener, more sustainable and more socially minded.

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