Sustainability-Linked Bonds: The Impact of Innovation on Sustainable Business and Finance

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Daniel Esty
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Sustainability-linked bonds (SLBs) have captivated experts and investors since their inception in 2019. Unlike use-of-proceeds bonds, which require issuers to earmark proceeds for sustainable projects, SLB proceeds can be used for any purpose. To earn the sustainability tag, issuers commit to achieving sustainability performance targets by a certain date. If they fail, a penalty is applied, often in the form of a coupon-rate increase. By analyzing a sample set of 27 SLBs and examining major trends, this essay explores the potential for SLBs to expand sustainable finance and discusses several best practices in the nascent SLB market. Ultimately, the analysis suggests that SLBs may help to expand sustainable debt markets. There is a strong “business case” for issuers, and the bonds in the sample enticed new market entrants and experienced strong investor demand. The analysis also points to emerging best practices, such as alignment with international climate goals and targets that go beyond a “business-as-usual” trajectory. Finally, this research concludes that for the SLB market to thrive, the International Capital Markets Association must update its SLB guidelines to reduce complexity, improve comparability, and incentivize market growth.