Investing in your ESG strategy: What you need to know about sustainable bonds

April 26, 2021

As with any new asset category heading quickly into the mainstream, corporate issuers should prepare for more scrutiny over what constitutes an eligible and attractive sustainability offering.

US companies looking to fund expansion in sustainable and inclusive ways are finding ready partners in the capital markets. Investor appetite for environmental, social and governance (ESG)-linked instruments continues to grow. PwC projects global green bond issuance will increase by over 40% to top US $500 billion this year. 

With more companies looking to align their business strategy with ESG goals, the growth isn’t surprising. Options for sustainable financing are increasing. Consider sustainability-linked bonds (SLBs) — instruments most closely tied to financing activity toward attaining a goal, such as a specific target to reduce a company’s carbon emissions over the next ten years. SLBs entered the market around two years ago and now form a market projected to grow to as much as $150 billion this year, according to one estimate

At the same time, investor scrutiny is intensifying. Investors want to understand the long-term impact of their funding on a company’s environmental or social performance, which are subjects typically included in a company’s separate ESG reporting with metrics such as energy and water consumption, employee turnover or sustainable product differentiation. Stakeholders are seeking more transparency over bond impact metrics that show the relationships between the activities or targets specified in the bond and the company’s overall ESG strategy--and beyond in terms of indirect impacts on stakeholders including energy providers, raw material suppliers and green building landlords.

How are green bonds shaping a company's ESG investments?

There’s increasing variety in the way proceeds from green, or more broadly, sustainable bonds are being used. When businesses look into ESG factors in detail, they’ll often find that they’re already taking or planning actions that map into established ESG frameworks that are typically used to qualify investments for financing. Consider:

  • New or retrofitted buildings that obtain third-party environmental certifications, like LEED, are a common use of the proceeds from a green bond. 
  • Investments that help to replenish watersheds, convert equipment to make more use of sustainable materials or fund EV charging stations and a bike-sharing program for employees are also examples of initiatives included in successful offerings. 
  • Expenditures on third-party certified sustainably-sourced materials or renewable energy contracts are common green attributes that align with a company’s ESG strategy. 
  • Investments to provide access to healthcare in lower-income economies or financing to minority-owned businesses in the US are examples in social bond offerings.

Still there are limits to what is considered sustainable through an ESG lens. We expect this will matter more as corporate ESG reporting and disclosure expectations continue to expand, with the result that sustainability metrics sharpen. ESG-impact investors will find they can become more selective as their own monitoring improves to help them avoid greenwashing. Regulatory agencies are also focusing more closely on ESG trends. For example, while the new rules taking effect in the EU under the Sustainable Finance Disclosure Regulation (SFDR) apply to asset managers, they’re likely to also accelerate the trend among issuers to use established sustainability frameworks in their offerings.

What do investors expect in a sustainability offering?

1. A credible ESG story

Developing the case for financing ESG activities begins with selecting the suitable type of offering. A use-of-proceeds bond concept applies to financing or refinancing projects that meet the criteria as an environmental (green) or social activity. Sustainability-linked bonds are less common. The financial and/or structural characteristics of SLBs can vary, depending on whether the issuer achieves the ESG objectives that were set out in the offering. An issuer might, for example, commit to a specific target for lowering greenhouse gas (GHG) emissions over the life of the bond, with payment in the coupon reflecting whether an annualized target has been met.   

In a green or social bond (or a mix of the two, a sustainability bond), identifying the projects and accompanying expenditure to allocate the offering proceeds to relies on the organization’s ability to classify what qualifies and what doesn’t. Second, the ability to flag the qualifying projects in reporting systems is critical to the accurate allocation of the proceeds.

An SLB additionally depends on the issuer’s ability to assess and set the relevant key performance indicators (KPIs) or sustainability targets, such as emissions reductions, that they can credibly measure and report against. 


Determining eligibility: Categories identified in frameworks, such as the green bond principles and sustainability-linked bond principles developed by the International Capital Market Association, provide recommendations for issuers to align with the leading framework globally for the issuance of sustainable bonds. This framework  provides issuers with guidance on the key components to follow to issue a credible bond, including recommendations on disclosure and reporting. The criteria is broad and high-level — and intentionally so. The principles are meant to set guidelines, not strict rules, about what should be included in the offering. As a result, issuers will have to make the connection between the activity they’re financing and the appropriate ESG factor or principle, and be prepared to defend it. 

  • Example: An issuer links investments to modernize its packaging center to an ultimate reduction in demand for a valuable natural resource (like trees). By sunsetting energy-intensive equipment and purchasing more recycled cardboard, the company is contributing to the development of a circular economy and thus is aligned to a sustainable principle to reuse more. 

Allocating projects: Many reporting systems aren’t equipped to readily supply the information needed to compile a use-of-proceeds summary of qualifying expenditures and determine their eligibility. As a result, issuers may run the risk of either missing or double counting their qualifying activities. 

  • Example: Acceptable practice allows a bond issuer to allocate bond proceeds to historical eligible transactions, commonly referred to as a ‘lookback’ period. Consider the questions facing an issuer reviewing activities over a two-year period for hundreds of financing transactions, some of which may qualify for the allocation of proceeds for an offering. Does the historical financing transaction align with the stated eligibility criteria? What evidence is available to support this determination? Did the transaction actually take place in the reporting period? Did the final deal value change? How are duplicate transactions across business units identified? Are there controls over system accuracy and completeness for these specific attributes?

2. Credible reporting

With expectations rising for more information around environmental and social impacts, issuers should anticipate more scrutiny on their ESG reporting and disclosures, including how sustainability offerings tie into the company’s ESG strategy. Companies should aim to align the bond impact metrics and their existing ESG metrics, commitments and targets. Asset managers who invest in the ESG-type offerings are taking the lead to strengthen transparency expectations in order to improve their ability to assess and compare business ESG plans, but other stakeholders are joining the table.

There are many different frameworks and standards for enhanced ESG disclosures. Global Reporting Initiative (GRI) standards have advanced sustainability reporting for years, and the Sustainability Accounting Standards Board (SASB) provides industry-specific recommendations and there are varying expectations from the rating agencies. With respect to climate change, consensus is building around the Task Force on Climate-related Financial Disclosure (TCFD), supported by more than 1,500 companies and key regulatory agencies. 

There are two steps issuers can take to increase confidence in their offering and demonstrate transparency to stakeholders prior to issuance and over the term of the bond. 

  1. An important initial step is the assessment by a third party of the alignment of an issuer’s framework with the Green or Social Bond Principles. This includes an assessment of the criteria selected for their offering, specifically whether the activities identified are suitable or eligible. These are second-party opinions, typically provided by sustainability ratings providers, and are conducted early on. These opinions also comment on the alignment of the proposed bond to the issuer’s historical ESG reporting, providing a measure of transparency to offerings that is becoming table stakes.
  2. The prospectus often includes a use of proceeds section describing how the company intends to use (or allocate) the proceeds of the offering, as well as a statement that within or after the first year post-issuance, and possibly each year over the life of the bond, the company will obtain an independent accountant’s report stating whether the company’s assertion that it used the proceeds in accordance with the use of proceeds set out in the offering is fairly stated, in all material respects.
    • Example:  A company finances renewable energy projects with green bonds. An independent accountant’s attest examination would evaluate the company’s assertion as to how the proceeds were used.
    • Example: A company provides mortgages to tenants meeting certain low income classifications. An independent accountant’s attest examination would evaluate the company’s assertion that the loan recipients met requirements and were provided with the financing.  


Maintaining data quality: Systems and processes to develop post-issuance  reports for investors may be inadequate. There can be quite a few gaps for companies to address.

Sustainability is a relatively new area of reporting. Relevant data typically resides outside of financial reporting systems and may not be subject to established governance protocols to ensure clear ownership, control, integrity and fit for purpose. 

The ESG framework that outlines the eligibility criteria and metric definitions the issuer developed to allocate the proceeds calls for KPIs that the company hasn’t used historically or haven’t been subject to audit before. 

The impact metrics that will be used to show performance, such as the key performance indicator in an SLB, are inconsistently calculated when compared to the company’s existing ESG reporting or do not align with existing strategic business plans.

Impacts to baseline metrics used in the SLB that may result from an acquisition or changes in methodology may not be accounted for correctly, distorting future performance.

Steps to take to meet investor expectations

The market for sustainable financing is growing quickly along with demands for greater transparency advancing alongside as major investors address concerns about greenwashing. The more companies can prepare upfront, the more they can lower risk of missing an opportunity to access capital for goals or projects that capital markets were relatively reluctant to support just a few years ago. 

What to consider before issuing a bond

1. Develop the framework you’ll follow, e.g., the green bond principles, and the specific eligibility criteria that you’ll include in the prospectus.
2. Consider engaging an outside specialist on sustainability criteria to provide a second-party opinion. This can add transparency to the use of proceeds and to the credibility of the bond. You may find you need to update your framework to clarify some spending categories as a result.
3. Consider including relevant ESG impact metrics within your bond framework to demonstrate how those proceeds will be used to generate broader impact, e.g., emissions reduction metrics. Align methodologies, targets and opportunities with your existing ESG program.
4. Perform a readiness review of the reporting and data collection process. Can you confirm eligibility under your framework? Do you have evidence to support the allocations? Are you comfortable with identifying enough eligible activities or projects to meet the bond size over the term? Are the controls in place to report the data externally and draft the use of proceeds statement? 
5. Update the framework for any final comments on the website and in the prospectus so that the framework, the second-party opinion and the use of proceeds, are aligned. Your framework may include plans to report annually and engage an independent accountant to examine the company’s assertion of how the proceeds were used.

Meeting investor expectations after the launch

1. Consider implementing controls to track and record data, and start to validate the historical lookback spend and develop the cumulative spend data.
2. Before the bond anniversary, consider engaging an independent accountant to provide third-party assurance on use of proceeds statement. Work can be done anytime post issuance on any historical lookback period. 
3. Report the use/allocation of proceeds annually, for example, on a website. 
4. Report on the related ESG impact metrics, making sure they are aligned with your existing ESG reporting communications.

Contact us

Jennifer Kosar

Trust and Transparency Solutions Leader, PwC US

Sara DeSmith

Sustainability Partner, PwC US

Rich Gilchrist

Managing Director, PwC US

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