Labelled bonds are sustainable finance instruments designed to raise capital for projects with positive environmental or social outcomes. We view them as an important component of a diversified impact portfolio that seeks measurable impacts on society and the planet. The main categories of labelled bonds include “green”, “social”, and “sustainability bonds.” Each adheres to principles established by the International Capital Market Association (ICMA)[1], which plays a crucial role in standardising frameworks, disclosure, and reporting practices for labelled bonds. ICMA guidelines promote transparency and accountability and reinforce market integrity, but despite the increasing standardisation trend, there are still disparities in frameworks and inconsistency in reporting by issuers that don’t necessarily follow the established guidelines. Our view is that investors looking to maximise the quality of reporting and credibility of their impact bond portfolio should conduct thorough due diligence on this market as not all labelled bonds are created equal.
Two main analyses are needed throughout a labelled bond’s lifecycle to identify high-quality options. At bond issuance, the focus is on the bond framework, which outlines the rules for the use of proceeds. A year after issuance, bond allocation and impact reports provide crucial information for evaluating the bond’s use of proceeds actual impact.
Labelled bond framework analysis
Today, nearly all labelled bond frameworks claim adherence to ICMA guidelines and often include a second-party opinion for credibility. Nevertheless, yet significant detail variations exist. Scrutinising each category in the use of proceeds section is essential as discrepancies can affect fund usage expectations. Loosely defined categories may result in the issuance yielding negative impacts or conflicting with the investors’ intent to avoid or exclude specific sectors. Pre-allocation reports, though rare, can offer clarity on intended impacts, ensuring objectives align and reducing misalignment risks.
For social use of proceeds, well-defined target populations ensure funds reach individuals or communities lacking investment access, enhancing additionality. For instance, directing affordable education to low-income families is more beneficial, whereas vague definitions may wrongly fund those who do not need assistance. Assessing, and trying to measure the materiality of financed activities to the issuer’s business model can help determine whether the issuer has a true commitment to the stated outcomes and reduces the risk of greenwashing in an impact portfolio.
The issuer’s plans for impact reporting are critical to understand. Disclosing planned impact indicators aligned with standards and ICMA principles reassures investors, as they can gage whether reporting will meet expectations, and that standardised metrics can be aggregated at the portfolio level. Some bonds offering only qualitative reports or lacking impact KPIs hinder transparency and understanding, signalling potential reporting weaknesses. Engaging with issuers to adopt best practices is essential to push meaningful improvements in reporting quality, particularly given the one-year gap between issuance of a bond and the provision of impact reporting.
Impact and allocation reporting analysis
One year post issuance, issuers disclose allocation and impact reports. Allocation reports should transparently show how proceeds are distributed across categories, ensuring alignment with the bond framework.
It is critical to examine the KPIs used by an issuer when analysing the quality of impact reporting. Investors should ideally compare impact per million dollars issued across similar bonds, necessitating clear, comparable indicators. Developing scales from extensive data on labelled bonds helps evaluate a bond’s “impact efficiency.”
Discrepancies often arise, with some bonds providing specific impact reports with the most accurate assessment closest to the invested capital, which reduces the need for approximations and proxies but posing complexities for issuers. Other options include portfolio-level reports that attribute impact to groups of bonds, risking approximations about a specific bond’s capital usage. At worst, reports may merely share project examples, offering an incomplete impact view.
Another critical aspect is whether financial issuers report the allocated impact rather than the total project impact, avoiding double counting. Properly allocated reporting reduces misrepresentation risks.
In addition, it is important to distinguish between financed and refinanced projects, as new projects boost impact investors’ additionality and contribution requirements. External verification also adds credibility to impact reporting; independent audits enhance governance, especially under scrutiny, bolstering trust in issuer claims.
Conclusion
We believe that “labelled bonds” are effective tools for impact investors seeking credible outcomes in listed debt markets. Their increasingly structured approach helps to ensure clearly stated impact intent through the deployment of standardized frameworks and transparent reporting. The measurability of impact is reenforced by well-defined indicators and targets that issuers should be following to ensure credibility with impact-focused investors.
Again, not all labelled bonds are created equal and analysis based on the factors noted above remains a critical aspect of portfolio construction. The market has made strides towards standardisation, but inconsistencies remain, and proper diligence should be a priority and selection criteria should be clear. Well informed impact bond investors have power to send signals in the market by subscribing to bonds from issuers that show a commitment to strong frameworks and high-quality reporting. Impact-investors have an important role to play in pushing continued advances in quality and effectiveness of labelled bonds that seek positive outcomes in sustainable finance.
-end-
Important Information
Marketing material for Professional Clients and Qualified Investors only. The information contained herein is confidential and may not be further distributed or reproduced by the recipient.
The information in this document was produced by BlueOrchard Finance Ltd (“BOF”), a member of the Schroders Group.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Performance data does not take into account any commissions and costs, if any, charged when units or shares of any fund, as applicable, are issued and redeemed. Emerging markets impact investments involve a unique and substantial level of risk that is critical to understand before engaging in any prospective relationship with BOF and its various managed products. Investments in emerging markets, particularly those involving foreign currencies, may present significant additional risk and in all cases the risks implicated in this disclaimer include the risk of loss of invested capital.
BOF has expressed its own views and opinions in this document and these may change without notice. Information herein is believed to be reliable but BOF does not warrant its completeness or accuracy.
The data contained in this document has been sourced by BOF and should be independently verified. Third party data is owned or licenced by the data provider and may not be reproduced, extracted, or used for any other purpose without the data provider’s consent. Neither BOF nor the data provider will have any liability in connection with the third party data. The terms of the third party’s specific disclaimers, if any, are set forth in the Important Information section at www.blueorchard.com/legal-documents/.
This document may contain “forward-looking” information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised.
BOF has outsourced the provision of IT services (operation of data centres, data storage, etc.) to Schroders group companies in Switzerland and abroad. A sub-delegation to third parties including cloud-computing service providers is possible. The regulatory bodies and the audit company took notice of the outsourcing and the data protection and regulatory requirements are observed.
For information on how BOF and the Schroders Group may process your personal data, please view the BOF Privacy Policy available at www.blueorchard.com/legal-documents/ and the Schroders’ Privacy Policy at https://www.schroders.com/en/global/individual/footer/privacy-statement/ or on request should you not have access to these webpages.
Issued by BlueOrchard Finance Ltd, Talstrasse 11, CH-8001 Zurich, a manager of collective investments authorised and supervised by the Swiss Financial Market Supervisory Authority FINMA, Laupenstrasse 27, CH-3003 Bern.
Copyright © 2025, BlueOrchard Finance Ltd. All rights reserved.
Sources: