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Sustainable finance on the capital market
Guest article by Mirko Gerhold, "Head of Corporate Bond Origination & Solutions" at Commerzbank AG

The European Green Deal is the jewel in the EU’s climate crown, reinforcing its ambitions of becoming the first completely carbon-neutral supranational union by 2050. To meet this ambitious target, far-reaching changes will be necessary across all industries. The financial sector is no exception, what with its financing schemes for upcoming investments in the different sectors. EU member states  will only be able to achieve net zero if companies invest more sustainably. In our newest en:former series, titled ‘Sustainable Finance’, we’ll be taking a closer look at the European Commission’s plans for the financial market, the opportunities for sustainable investments and the ‘green banking’ trend.

Combatting climate change and hitting climate targets require huge sums to be financed. All the while, integrating sustainability into corporate strategies is becoming increasingly important due to the transformation of the real economy. Against this backdrop, we are witnessing significant growth in sustainable financing solutions on the capital market as well.

There are two main types of sustainable financing instruments. In the first category, the conditions are linked to the achievement of certain sustainability goals. Examples are loans and bonds whose interest rates drop if the borrowing company displays particularly sustainable development. The second category consists of instruments the purpose of which leads to sustainability. Most sustainable bonds belong to this class.

Proceeds from the issuance of such bonds are used to finance sustainable projects. Green bonds aim to finance environmental projects, for example in the fields of renewable energy or energy efficiency, while social bonds are used to finance social projects, for instance in education or the health sector. Furthermore, some sustainable bonds finance both green and social projects.

We have witnessed extremely dynamic growth on the sustainable bond market yet again this year. Whereas global emissions were valued at around EUR 219 billion in 2019, more than EUR 380 billion in new green and social bonds had been issued by the beginning of December 2020. Traditionally, the green bond market has been the bigger of the two, owing in part to climate change and the energy transition. However, we have also seen a strong rise in social bonds this year – above all for financing required to cushion the effects of the COVID-19 pandemic.

Photo credit: Shutterstock.com, ST House Studio

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