Sustainability-Linked Bond
AdvancedA sustainability-linked bond is a bond whose financial terms, usually the interest rate, change depending on whether the issuer meets predefined sustainability targets by a set date.
Like sustainability-linked loans, these bonds can be used for general purposes. The issuer commits to targets measured by key performance indicators, such as cutting emissions or increasing renewable energy use.
If the issuer misses its targets, the bond’s coupon typically rises, often by 0.25 percentage points, giving investors compensation and the issuer a financial incentive to perform.
For example, a utility company might issue a ten-year sustainability-linked bond with a coupon that rises by 0.25 percentage points from year six if it has not reduced its emissions intensity by 40% by then.
The International Capital Market Association publishes the Sustainability-Linked Bond Principles, which cover the selection of performance indicators, calibration of targets, bond characteristics, reporting and verification.
Sustainability-linked bonds allow companies without large green projects to raise sustainable finance. However, they have been criticised for targets that are not ambitious, penalties too small to matter and structures that allow issuers to call bonds before penalties apply. Investors look carefully at the strength of targets.
For worked examples and full lessons, visit notesbysara.org.