ABSTRACT
Sustainability-linked bonds (SLBs) promise to complement the use-of-proceed model of green bonds by tying general purpose debt finance to issuers’ sustainability performance against predefined targets. In this commentary, we highlight that the potential of SLBs to promote issuers’ climate transitions crucially depends on a common understanding of eligible economic activities and material performance indicators, the use of science-based targets as best practice, the ability of borrowers to dispel concerns about greenwashing risk, and bond characteristics that set meaningful incentives for issuers to improve their carbon performance. Future research should investigate the climate-related additionality of SLBs, assess if bond characteristics and changes in capital costs support issuers in meeting or even increasing their climate targets and deter unsustainable investments, and better understand the challenges and opportunities for the SLB market to bring about system-level innovation to the financial system.
Acknowledgements
We would like to thank the anonymous reviewer for their substantial comments that helped to improve the manuscript.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 SLBs like any other bond can be defined as financial instruments as per, among other relevant regulation, the EU’s Markets in Financial Instruments Directive (2004/39/EC).
2 Bloomberg New Energy Finance, as of 31 December 2021. Includes outstanding and repaid bonds.
3 Bloomberg New Energy Finance, as of 31 December 2021. Includes outstanding and repaid bonds.
4 Bloomberg New Energy Finance, as of 30 September 202. Includes outstanding and repaid bonds.
5 Bloomberg New Energy Finance, as of 30 September 202. Includes outstanding and repaid bonds
6 Bloomberg New Energy Finance, as of 30 September 202. Includes outstanding and repaid bonds.
7 ECB to accept sustainability-linked bonds as collateral (europa.eu).
8 EU eyes SLB label in big expansion of sustainable finance rules (globalcapital.com).
9 SSAB issues Sustainability-Linked bond amounting to SEK 2,000 million – SSAB (cision.com).
10 Repsol set to raise 1.25 bln euros from sustainability-linked bond | Reuters.
11 The EU’s sustainability objectives are climate change mitigation, adaptation, the sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystem.
12 EU taxonomy for sustainable activities | European Commission (europa.eu).
13 Bloomberg New Energy Finance.
14 Bloomberg New Energy Finance.
15 HM_Sustainability-Linked Bond Framework_Final_Newfont (hmgroup.com).
16 sse-slb-framework.pdf.
17 tesco-sustainability-linked-bond-framework.pdf (tescoplc.com).
18 Europe’s first sustainable junk bond draws scrutiny over green impact | Financial Times (ft.com).