03 November 2022

EURACTIV: Sustainability-linked bonds, the rising star of green finance

Sustainability-linked bonds come with specific targets – or key performance indicators (KPIs) – related to a company’s loan. If they meet their targets, the interest paid on their debt will be lower, which acts as an incentive for companies to go green.

The market for sustainability-linked bonds (SLBs) hit the symbolic $100 billion mark in 2021, one year after they were first introduced, a spectacular growth which is starting to attract the attention of EU policymakers wary about the risk of greenwashing.

$100 billion is “an awful lot and not much” in relation to the market for sustainable investment, that was worth almost $1 trillion last year, according to Nicholas Pfaff, deputy CEO at the International Capital Market Association (ICMA).

Yet, its stellar growth seems to have surprised even seasoned observers like Pfaff.

“If you consider how long it took for green bonds to get to $100 billion, which was almost six years, the SLBs hit $100 billion in only a year. So clearly, it hit a sweet spot in the market,” he said.

Pfaff was speaking at a European Parliament event last week, which looked at sustainability-linked bonds as an instrument to drive the green transition.

By contrast with green bonds, which are issued by companies or governments to finance specific projects like the construction of a new wind farm, sustainability-linked bonds are related to the overall environmental performance of a company.

Banks like Morgan Stanley pay increasing attention to the environmental performance of companies because it can impact their ability to repay their loan, explained Domenico Siniscalco, vice-chairman and head of Italy at the US investment bank.

“And we always look at environmental risk, because it means hidden liabilities, or future possible issues and problems,” he told the Parliament event.

Key performance indicators

Sustainability-linked bonds come with specific targets – or key performance indicators (KPIs) – related to a company’s loan. If they meet their targets, the interest paid on their debt will be lower, which acts as an incentive for companies to go green.

Italian energy utility Enel was the first to experiment the instrument, in 2019. Alberto De Paoli, the company’s CFO, said the aim was “to have a general purpose financing” of Enel’s overall transition as a company.

“That’s why we invented this instrument,” De Paoli told participants at the event. “It’s not because we are good guys. It’s not because we want to save the world. But because we are offering a more profitable and less risky company,” he said.

But the growing success of SLBs is also starting to attract scrutiny from policymakers and the wider finance community.

EURACTIV

© EURACTIV