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LEARNING RESOURCE
sustainability performance targets or
submit to sustainability-related processes,
such as gaining B Corp Certification,
Fundamentals of ESG Certificate submitting to human rights audits,
Kick-start your understanding of ESG (environmental protection, developing low-carbon products, or
social inclusion, and governance) issues with this course, designed showing high levels of resource re-use or
to help you learn how the landscape has developed and the key recycling. These bonds often require
role CPAs and finance professionals have to play. enhanced accountability or assurance
procedures.
Find this course in the AICPA Store and in the CGMA Store.

COURSE Impact investors
There is a growing consensus that
long-term financial returns depend on
robust and resilient socio-ecological
systems and all of humanity benefits from
help identify whether your project is commercial companies and government maintaining these systems. Linked to this
officially defined as sustainable. Many agencies. A number of companies have perspective is the growth in impact
sustainability projects are linked to tax created special bonds designed to fund investing, where individuals,
breaks and subsidies that dramatically their sustainability transformation philanthropic foundations, private equity,
improve the after-tax cost of capital. It’s not projects; eg, since 2017 Scottish and and financial institutions fund projects or
quite free money, but it’s always worth Southern Energy in the UK has issued businesses with the express purpose of
checking before looking for commercial green bonds worth €2.75 billion to ensure achieving specific social or environmental
deals. it can operate sustainably and responsibly. outcomes as well as secure financial
Sustainability bonds have two main returns. While some of these impact
Innovative repayment schedules features. First, issuers commit to investors are connected to philanthropic
Many sustainable investment products restricting the use of the actual funds to foundations, such as the Rockefeller
don’t use fixed-term interest repayment achieve pre-specified SDG objectives. Foundation, most financial institutions,
schedules but try to match the repayment Second, they have a covenant that links eg, BlackRock, have launched impact
schedule with how the financial benefits the investors’ returns to the issuer’s investment funds or instruments. Even
accrue. For example, some UK public achievement of these objectives, with Harvard Business School has entered this
sector organisations in England and Wales possible decreases or increases in the market with its social enterprise impact
have been able to access loans for investors’ returns. This variation in return fund. A number of leading private-equity
installing energy-saving schemes with a to investors is a way to share the risks and companies are also developing impact
repayment schedule tied to actual energy benefits accruing from the use of these investment funds.
savings. This means that the cost of this funds. For example, climate bonds include These impact investment funds often
type of project is spread over the forecast interest rates pegged to a schedule of focus on funding for specific projects,
cost savings, reducing the cash flow risk. reductions in greenhouse gas emissions. technologies, or infrastructure that has
A similar logic applies to financial This means if the business’s greenhouse measurable social, economic, and
products designed to operate in accordance gas emissions rate of reduction exceeds a environmental benefits. The advantage of
with Islamic principles, such as Green specific target, then a lower return is paid impact investment is that the funder often
Sukuks, where the repayment is triggered to the investors, whereas if greenhouse has high levels of expertise to help design,
by the achievement of specific positive gas emissions’ rate of reduction is lower measure, and support the delivery of
benefits derived from the assets funded by than the target, a higher return is paid. positive impact. In addition, impact
the loan. These types of financial products This provides a financial incentive for the investors can tailor the terms of the
are particularly useful for projects where business to invest in projects with a investment to the activities and may even
future cost savings do not occur in a linear greater possibility of reducing emissions. take shared ownership of assets over the
fashion or may take a longer time to occur. These bonds go by many “brand” long term.
For example, the greenhouse gas absorption names, based on the outcome of the loans Impact investing requires greater levels
capacity of newly planted forests grows and any restriction on how they’re spent. of collaboration and engagement between
over time and may not reach optimal levels Green bonds are restricted to projects that funder and borrower than other forms of
for up to 100 years. If the repayment reduce environmental impacts. Blue sustainable investment products. This
schedule reflects this natural process, it is bonds are targeted at projects that reduce level of engagement leads to greater shared
then likely to act as an incentive for water use or protect the oceans. Nature knowledge about projects that may have
much-needed investment in nature-based performance bonds are intended to fund high levels of technical or financial
climate solutions. projects that reduce biodiversity damage. uncertainty, which allows informed
SDG-linked bonds are used to fund decisions as to appropriate high set-up
Sustainability bonds and contingent projects that support the achievement of costs, risk premiums, and cash flow
interest instruments the SDGs. Sustainability-linked loans exist assumptions.
There is a growing market in across different sectors and are designed The customisability of impact
sustainability bonds, issued by to incentivise borrowers to hit specified investments can result in a substantially

22 I FM MAGAZINE I April 2023