Holistic sustainability: Green bonds as a catalyst of environmental and social impact

Highlights

• Franklin Templeton Fixed Income (FTFI) takes a holistic approach to analyze green bonds as financial instruments that build synergies between positive environmental and social impact.
• Green bonds mobilize capital for projects that mitigate environmental challenges, advance social progress by supporting sustainable development goals (SDGs), provide measurable outcomes and generate financial returns.
• By viewing green bonds as a catalyst of both environmental and social impact, we aim to drive changes in the investment landscape through holistic analysis.

Introduction

Climate, biodiversity and social factors are intertwined. There is little value in pursuing improvements in one at the expense of the others. Flourishing life on earth depends on healthy ecosystems and a healthy planet. However, the planet faces an unprecedented biodiversity crisis, with extinction rates accelerating and ecosystem diversity diminishing across all levels, from genetic to ecosystem diversity.¹ This environmental emergency is not isolated from economic systems; rather, it poses substantial financial risks that investors increasingly cannot ignore. Biodiversity loss represents a significant threat to the global economy by undermining the ecosystem services upon which most large companies heavily depend.² From pharmaceutical discoveries to agricultural productivity, the economic value derived from functional ecosystems is immense yet often undervalued in traditional investment models.

Dual impact of green bonds: environmental and social outcomes

Green bonds have emerged as powerful financial instruments that seek to bridge the gap between environmental sustainability and positive social transformation. They effectively mobilize capital for projects intended to tackle climate challenges while supporting sustainable development goals (SDGs). This approach can generate competitive financial returns while also creating measurable environmental outcomes and advancing social progress, in our view.

The connection between green finance and sustainable development highlights how environmentally focused investments can generate broader societal benefits that extend well beyond ecological considerations. Therefore, rather than viewing environmental objectives as separate from social considerations, our holistic approach recognizes their interdependence. Investment in green projects is an investment in our future. It seeks to create many positive effects for the economy and society by facilitating climate change mitigation, nature conservation and human well-being.

Research indicates that six SDGs receive the greatest boost from green bond investments: SDG 6 (clean water and sanitation), SDG 7 (affordable and clean energy), SDG 9 (industry, innovation and infrastructure), SDG 11 (sustainable cities and communities), SDG 13 (climate action) and SDG 15 (life on land)^3,4. For instance, green projects focused on sustainable cities and communities (SDG 11) help create more habitable urban environments while addressing climate challenges⁵ to build modern, sustainable cities and resilient cities. The integration of environmental and social objectives in these projects demonstrates how green bonds can be catalysts of environmental investments and community development. By improving living conditions and strengthening city infrastructure, these bonds are designed to generate positive social impacts that directly benefit urban populations.

Another example is biodiversity conservation projects that engage local communities in participatory design and implementation, and which tend to deliver better sustainable outcomes when addressing social equity concerns.⁶ This integration is particularly evident in urban contexts, where investments in nature-based solutions can simultaneously address climate resilience, biodiversity enhancement and social well-being. The State of Finance for Nature in Cities 2024 report emphasizes that urban nature investments can help cities tackle multiple challenges simultaneously, from climate change adaptation to community development.⁷ Further, ensuring fair access to green spaces can reduce health inequalities, especially for vulnerable communities affected by chronic health conditions and limited access to such areas.⁸ Another positive effect of investing in nature-based solutions includes improved mental health, residents that benefit from a higher local or regional quality of life and living space and promotion of healthier lifestyles, among others.^9,10 . Sydbank¹¹ can serve as an exemplary issuer, in our view.

Towards holistic investment analysis

The integration of environmental, social, and governance (ESG) criteria into green bond evaluations represents a critical step in sustainable finance. However, this is not a final solution; recent research calls for more comprehensive frameworks that consider not just environmental but also social outcomes in assessing green bond projects.¹²

The International Capital Market Association’s (ICMA) Green Bonds Principles (GBP) are a cornerstone of sustainable finance, providing a framework to harmonize environmental outcomes with financial transparency.^13,14,15,16 By emphasizing four components (use of proceeds, project evaluation processes, proceeds management, and reporting), the GBP creates a base for integrating environmental and social indicators into investment decisions¹⁷ (see Table 1). Also, the European Union Green Bond Standard (EU GBS) encourages issuers to report on social metrics such as job creation, thereby fostering alignment between environmental and social goals.¹⁸ In addition, the “Do No Significant Harm” (DNSH) principle, which is a key element of both the EU Taxonomy for Sustainable Activities (EU Taxonomy) and the Sustainable Finance Disclosure Regulation (SFDR), is crucial. To determine if an investment is sustainable, Financial Market Participants (FMPs) must assess whether it avoids causing significant harm to society or the environment in the process.¹⁹

At FTFI, we incorporate this approach in our proprietary Sustainable Impact Database (SID). The SID collects standardized data from public reports, tracking allocations and impacts of bonds in our sustainability funds. It includes contributions to project categories, United Nations Sustainable Development Goals (UN SDG) impacts, and project locations. Our environmental and social indicators follow ICMA guidelines. We think that impact indicators provide a broader perspective on investment success, one that includes environmental and social outcomes as well as economic returns. Taking the above into account, during our investment process, whenever possible, we turn towards investments that acknowledge impact in a broader context.