First Draft of Final Paper
Introduction:
In the modern day, investors care more than ever about the ethics of business. As climate change worsens and social injustice becomes a larger part of the public consciousness, maintaining a public image aligned with ethical conduct is a crucial part of multinational firms’ images. However, the challenges of business have changed as well. While firms previously focused on how to enrich themselves, firms now have to think more about how they can enrich themselves and better the world around them at the same time. In this environment, financial instruments known as Use of Proceeds Bonds have become popular, as they dedicate the funds raised to specific positive net impact causes. The two that this essay focuses on are green bonds and social bonds. To consider why the private sector might invest more in one instrument than another, I compare the sources of investment in renewable energy (a green cause) relative to sources of investment in water infrastructure (a social cause). I will also go into specifics on investment in both sectors in terms of technology and regional variation. The purpose of this essay is to explore if and why one form of UOP bond is more popular than the other. However, it is not meant to be an answer as to why one is more popular than the other. The data I use is limited and would have likely had different results if I had used different data to represent green investment and social investment, such as conservation investment (green) against transportation infrastructure investment (social). By the end of this piece, there will be a hypothesis as to why one form of investment is more popular than another, not a conclusion meant to represent objective fact.
Which is Invested in More, Social Bonds or Green Bonds?
When looking at a breakdown of all the types of ESG-linked use of proceeds bonds, green bonds make up a clear majority of invested funds, and social bonds are only around a third of green bonds' size. This paper neglects to discuss sustainability/ sustainability-linked bonds since their guiding principles are too opaque, as they can cover any of the ESG catagories.
[1] "Category" "Product"
[3] "Year" "Investment in USD billion"# A tibble: 16 × 4
Category Product Year `Investment in USD billion`
<chr> <chr> <chr> <dbl>
1 Source Private 2013 174.
2 Source Private 2014 218.
3 Source Private 2015 276.
4 Source Private 2016 231.
5 Source Private 2017 232.
6 Source Private 2018 230.
7 Source Private 2019 225.
8 Source Private 2020 240.
9 Source Public 2013 64.3
10 Source Public 2014 70.5
11 Source Public 2015 63.5
12 Source Public 2016 32.5
13 Source Public 2017 120.
14 Source Public 2018 91.9
15 Source Public 2019 104.
16 Source Public 2020 108. 
Renewable Energy Analysis:
Between 2013 and 2020, annual private sector investment in renewable energy has been higher than public sector investment, but not by a proportionally extreme amount. Around 80% of overall investment has been dedicated to solar and wind energy. It is clear that renewable energy is a lucrative venture for the private sector to invest in, for one reason or another. External research validates this claim, as market forces are seeing the opportunity for profit found in a clean energy future. Public policy initiatives around the world alongside concerns of energy insecurity from the Russia-Ukraine war have driven overall investment in renewables to grow at a higher rate than fossil fuels(IEA, 2023). Policy initiatives incentivize energy investment by lowering costs to the firm, such as the tax shields provided by the US Inflation Reduction Act. Demand for clean energy technology is rising rapidly as energy infrastructure is replaced across the world, meaning early investors in clean technology firms could reap considerable returns in the future. Solar energy has attracted the most investment due to its predicted CAGR of 15% between 2023 and 2030(Forbes). In addition to this, contemporary solar and wind technology are also highly efficient. The two have the lowest generation costs relative to fossil fuel and non-fossil fuel energy sources(IEA 2, 2023). The private sector has been enticed into investing in renewable energy, especially solar and wind, due to the profitability of the sector. The public sector is encouraging and engaging in this investment, creating an environment where renewable energy projects are in high demand and thus green bond issuance is high.
# A tibble: 28 × 3
Year column_header total_investment
<chr> <chr> <dbl>
1 2007 Private Sector Investment 2991.
2 2007 Public Sector Investment 113765.
3 2008 Private Sector Investment 2529.
4 2008 Public Sector Investment 121541.
5 2009 Private Sector Investment 2064.
6 2009 Public Sector Investment 132049.
7 2010 Private Sector Investment 2180.
8 2010 Public Sector Investment 133903.
9 2011 Private Sector Investment 1071.
10 2011 Public Sector Investment 130069.
# ℹ 18 more rows# A tibble: 28 × 5
Year column_header total_investment total_investment_year percentage
<chr> <chr> <dbl> <dbl> <dbl>
1 2007 Private Sector Inves… 2991. 116755. 2.56
2 2007 Public Sector Invest… 113765. 116755. 97.4
3 2008 Private Sector Inves… 2529. 124069. 2.04
4 2008 Public Sector Invest… 121541. 124069. 98.0
5 2009 Private Sector Inves… 2064. 134112. 1.54
6 2009 Public Sector Invest… 132049. 134112. 98.5
7 2010 Private Sector Inves… 2180. 136083. 1.60
8 2010 Public Sector Invest… 133903. 136083. 98.4
9 2011 Private Sector Inves… 1071. 131140. 0.817
10 2011 Public Sector Invest… 130069. 131140. 99.2
# ℹ 18 more rows
Water Infrastructure Analysis:
A noteworthy aspect about social bonds is that they often target lower income groups, meaning finding meaningful data to represent social bonds is more of a challenge, as infrastructure investment data does not always isolate low income groups. For example, it is much easier to find global data on real estate investment than it is to find data on affordable housing investment, and it is even more challenging to find data that breaks down private sector investment in affordable housing versus public sector investment worldwide. Water and sewerage infrastructure investment is a good proxy for social bonds because it fundamentally serves a “social” purpose, as it is universally publicly accessible, while not all real estate investment does. In order to engage with this subject, three different data sources had to be consulted. The World Bank provided data on private sector investment, the Global Infrastructure Hub provided data on public sector water investment (but only in 2015 dollars), so CPI data from the Federal Reserve was used to adjust the private sector data in order to make the data comparable.
In a sharp contrast with renewable energy, almost all investment in water infrastructure between 2007 and 2020 has been public sector investment. Most private sector water infrastructure investment is concentrated in Latin America, the Caribbean, East Asia, and the Pacific Islands. In a sharp contrast to this, most public sector water infrastructure investment is in Western Europe and North America. Based on this data, it is clear that water infrastructure is not the focus of much private sector investment. Investment in water infrastructure, unlike many other utilities, lacks clear sources of revenue despite being a necessary public good. Often revenues collected from water infrastructure do not cover the lofty capital expense associated with the investment, and even if the investment does derive consistent revenue, the payment of the original investment can take 20-30 years to finish. On top of this, the risks of water investments are hard to quantify, as they are often idiosyncratic in a particular project and financial institutions have little experience with quantifying them (OECD, 2.2.2). This value proposition is not particularly attractive to private sector financial institutions, so it makes sense as to why this social good is financed primarily through public spending. If water infrastructure investment is a strong proxy for social bonds, then it is possible that social projects are largely not very lucrative and thus do not invite private sector investment.
It is noteworthy that private capital was used to develop water infrastructure in emerging markets with well-developed government bodies more frequently, while public capital was largely spent in developed markets. This may have to do with municipalities having fewer public finances to spend, leading more emerging markets to turn to public-private partnerships (PPPs). Through the PPP model, the private sector builds and operates the plant using its’ own capital, but sells the water to the government to disseminate publicly. As a result of PPPs, the private sector can be crowded-in to investment in water infrastructure(KPMG). This is interesting because the private sector can have an incentive to engage in social investment if there is a steady cash flow from it through a PPP, and this may explain why there is any social bond investment at all.
Conclusion:
It bears repeating; this paper is meant to illustrate a long-form hypothesis rather than a definitive argument. The data used does not paint a full picture of green bonds or social bonds, but is meant to propose a reason why overall investment in the two types of bonds are so different in quantity. Because this is the case, the purpose of this piece is to present a reasonable hypothesis based on the data analysed. However, this any and all claims in this paper would require rigorous analytical work before being provable.
The hypothesis that this paper considers is that the reason why green bonds attract more investment than social bonds is because the private sector is more interested in investing in green causes than in social ones, while the public sector invests in both causes.
Works Cited (I will write out the citations in my final draft):
https://www.icmagroup.org/sustainable-finance/sustainable-bonds-database/
https://www.irena.org/Data/View-data-by-topic/Finance-and-Investment/Investment-trends
https://www.gihub.org/infrastructure-monitor/data-tool/
https://ppi.worldbank.org/en/ppidata
https://fred.stlouisfed.org/series/CPIAUCSL#
https://www.iea.org/energy-system/renewables/solar-pv
https://www.nh.gov/water-sustainability/publications/documents/water-infrastructure-using-private-finance.pdf