Sustainability-linked bonds (SLBs) are a relatively new type of bond that links the issuer's financial and sustainability performance. Unlike green or sustainability bonds, SLBs do not require the proceeds to be used for specific environmental or social projects. Instead, the terms of the bond are structured so that the issuer is incentivized to meet certain sustainability performance targets, such as reducing greenhouse gas emissions, improving worker safety, or increasing renewable energy usage.
The financial incentives in SLBs are structured as penalties or bonuses based on whether the issuer meets the agreed-upon sustainability performance targets. If the issuer meets the targets, the interest rate on the bond is lowered, reducing the cost of borrowing. If the targets are not met, the interest rate is increased, increasing the cost of borrowing.
SLBs are designed to encourage issuers to take concrete steps toward sustainability while also providing investors with a way to support sustainability goals without necessarily specifying how their funds will be used. This type of bond can also provide a more flexible funding option for issuers since they are not required to use the funds for specific sustainability projects.
Since the introduction of the first SLB in 2019, the market for this type of bond has grown rapidly, with many issuers and investors expressing interest in this innovative financial instrument.
The ESG space is changing day by day, creating more uncertainty for decision makers
