How our sustainable bond framework can drive real impact

Key Insights

The sustainable bond framework drives high‑impact investments by scrutinizing the validity and additionality of projects they back to reduce greenwashing risks.
We use the framework to actively engage with labeled‑bond issuers to increase the financed activities’ potential of addressing the most significant issues.
Our updates factor in recent market changes, such as regulatory shifts and growing issuance complexity, to capture these benefits more efficiently.

Impact investment markets have evolved greatly in the past few years in terms of complexity, breadth, and even definition. Active managers in this space therefore need to be agile, adapt to these adjustments and help ensure that their impact assessment frameworks remain relevant.

T. Rowe Price has long recognized the need for robust frameworks, having launched our sustainable bond framework in 2020. It uses four key aspects to accurately scrutinize the intentionality, additionality, and measurability of sustainable bond securities from an impact perspective, namely the Issuer ESG Profile; Standards and Governance; Use of Proceeds; and Post‑issuance Reporting.

The framework takes the weighted‑average score of these four aspects and provides a traffic‑light score, acting as a data point within the security selection process.

Green bond proceeds’ use is diversifying

(Fig. 1) Green bond use of proceeds by project type.

As of March 31, 2025.
Source: Bloomberg Finance L.P., T. Rowe Price analysis.

On one level, it provides us with an opportunity to engage with companies pre‑ and post‑issuance on financial and sustainability strategies at every level, allowing us to obtain a clearer picture on the effectiveness of each labeled bond. On another, it can help us evaluate expected financial performance of labeled bonds, as we perceive that credibly structured labeled bonds should perform better than bonds lacking impact potential.

How impact investing has evolved

In the past few years, we have also observed several ways in which the impact investing market has changed. These include:

Changes in impact definitions by regulators. What authorities bracket as impact investing has changed over time. This makes it more difficult for investors to accurately assess opportunities as the addressable market is shifting.
Growing issuance complexity. How issuers use sustainable bonds has become more complex, both in terms of impact theme and security structure. Recent innovations on labels include blue and orange bonds. These securities finance water projects and gender‑equity strategies, respectively; for example, DP World issued a USD 100 million blue bond in December 2024 to fund projects focusing on marine transport and pollution and port infrastructure. Historically, the majority of sustainable bond issuance covered renewable energy, green buildings, and clean transportation.

We are also seeing a growing variety of bond structures. These include new labeled securitized instruments, sustainability‑linked loan bonds, and outcome bonds that align project impact performance to financial returns.
Mislabeling and greenwashing concerns. Sustainable debt markets’ growth has heightened worries that some securities may not be as societally impactful or labeled as accurately as they appear. Around 85% of institutional investors believe greenwashing has become a greater problem over the past five years, per professional services firm EY,¹ while a Morgan Stanley survey from December 2024 demonstrated that changing regulatory guidance and greenwashing were two of the top three key challenges to sustainable investing.² In addition, issuers are using labeled bonds to position themselves in the eyes of the market and their customers as innovators in finance and sustainability and not just to access capital.

"We have enhanced our existing sustainable bond framework...to better align with the fast-changing dynamics of the modern market."
Ellen O’Doherty, Analyst

Fine‑tuning the framework

We have enhanced our existing sustainable bond framework in light of these and other changes, to better align with the fast‑changing dynamics of the modern market. The updates focus on the Use of Proceeds and Post-issuance Reporting aspects of the framework, which together make up most of its weighting (roughly 45% and 25%, respectively).

We have updated our guidelines on assessing the credibility of specific social and green bond project categories, aligning them with market taxonomies, the United Nation’s Sustainable Development Goals and the Climate Bond Standard.
The framework now evaluates the proceeds’ type of use, with the view that different applications such as capital expenditure, operating expenditure (opex), or acquisition spending can be an indicator of impact. For example, an automotive manufacturer using proceeds to support increased electric vehicle capacity would, in our view, have a greater long‑term impact than if it allocated proceeds to maintenance opex, which may not support structurally long‑term incremental capacity.
We now consider the proportion of proceeds allocated to refinancing. A higher amount used to refinance older technology indicates less additionality, in our view, compared with issuers using most proceeds to finance new projects.
The framework also assesses any third‑party audits done on impact metrics. We believe this can help confirm the measurable impact of use of proceeds bonds, for instance, by assessing whether the issuer has solicited an audit on allocation data or impact data.

An active approach to labeled bonds

As the labeled bond market continues to mature and grow, it is incumbent on investors to not only evaluate issues using their own assessment frameworks, but also to be willing to adjust and improve them over time as markets progress.

The updates aim to position our framework for the sustainable markets of today, considering new market guidelines and experience on proceeds use and post‑issuance reporting trends. This complements and sharpens the framework’s existing benefit of providing us with a way of informing our issuer engagement through the life cycle of a transaction. We will continue to review our framework as the market evolves.

Updating our sustainable bond framework for 2025

(Fig. 2) Key parts of our four aspects, updates in bold

For illustrative purposes only.
Source: T. Rowe Price.

¹Responsible Investing Indicator Model (RIIM) is a proprietary tool developed to enhance research and aid better decision making. RIIM rates companies in a traffic light system measuring their environmental, social and governance profile and flagging companies with elevated risks: Green=No/Few Flags, Orange=Medium Flags, Red=High Flags.

Our sustainable bond framework in action

(Fig. 3) How our screening process can help decision making.¹

For illustrative purposes only.
¹Responsible Investing Indicator Model (RIIM) is a proprietary tool developed to enhance research and aid better decision making. RIIM rates companies in a traffic light system measuring their environmental, social and governance profile and flagging companies with elevated risks. (Green=No/Few Flags, Orange=Medium Flags, Red=High Flags).
Source: T. Rowe Price.

Matthew Lawton, CFA Head, Impact Fixed Income

Ellen O'Doherty, CFA Impact Analyst

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¹EY 2024 Institutional Investor Survey, EY, December 10, 2024.

²Sustainability Signals, Morgan Stanley, December 3, 2024.

For certain types of investments, including, but not limited to, cash, currency positions, and particular types of derivatives, an ESG analysis may not be relevant or possible due to a lack of data. Where ESG considerations are integrated into the investment research process, we may conclude that other attributes of an investment outweigh ESG considerations when making investment decisions.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Material risks—The following risks are materially relevant to the portfolio:

ABS and MBS risk—Asset-Backed Securities (ABS) and Mortgage-Backed Securities (MBS) may be subject to greater liquidity, credit, default and interest rate risk compared to other bonds. They are often exposed to extension and prepayment risk.

Contingent convertible bonds risk—Contingent Convertible Bonds may be subject to additional risks linked to: capital structure inversion, trigger levels, coupon cancellations, call extensions, yield/valuation, conversions, write downs, industry concentration and liquidity, among others.

Convertible bonds risk—Convertible bonds contain an embedded equity option which exposes them to risks linked to equity as well as fixed income. They may be subject to higher market and liquidity risk.

Credit risk—Credit risk arises when an issuer's financial health deteriorates and/or it fails to fulfill its financial obligations to the portfolio.

Default risk—Default risk may occur if the issuers of certain bonds become unable or unwilling to make payments on their bonds.

Derivatives risk—Derivatives may be used to create leverage which could expose the portfolio to higher volatility and/or losses that are significantly greater than the cost of the derivative.

Distressed or defaulted debt—Distressed or defaulted debt securities may bear substantially higher degree of risks linked to recovery, liquidity and valuation.

Emerging markets risk—Emerging markets are less established than developed markets and therefore involve higher risks.

High yield bond risk—High yield debt securities are generally subject to greater risk of issuer debt restructuring or default, higher liquidity risk and greater sensitivity to market conditions.

Interest rate risk—Interest rate risk is the potential for losses in fixed-income investments as a result of unexpected changes in interest rates.

Liquidity risk—Liquidity risk may result in securities becoming hard to value or trade within a desired timeframe at a fair price.

Prepayment and extension risk—Mortgage- and asset-backed securities could increase the portfolio's sensitivity to unexpected changes in interest rates.

General portfolio risks—To be read in conjunction with the portfolio specific risks above:

Capital risk—The value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different.

Counterparty risk—An entity with which the portfolio transacts may not meet its obligations to the portfolio.

ESG and sustainability risk—May result in a material negative impact on the value of an investment and performance of the portfolio.

Geographic concentration risk—To the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area.

Hedging risk—A portfolio’ attempts to reduce or eliminate certain risks through hedging may not work as intended.

Investment portfolio risk—Investing in portfolio’ involves certain risks an investor would not face if investing in markets directly.

Management risk—The investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably).

Operational risk—Operational failures could lead to disruptions of portfolio operations or financial losses.

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