Defining what a sustainability linked bond is

Summary: Standards matter - vagueness in the definition of what makes a sustainability linked bond (SLB) makes it tough for investors to be sure that they "do what it says on the tin".

Why this is important: SLBs are relatively new but have been subject to a number of criticisms from their lack of ambition from issuers, the low level of punishment and the ability to wriggle out of paying the extra coupon.

The big theme: Debt markets can play a massively important role in funding and encouraging companies that contribute to sustainability. In many ways it's a more important market than equity, as the debt markets are where most companies raise new capital. New global "green" bond (GSS+) issuance last year (2021) was $1.1 trillion, making up c.5% of all bond debt priced. However, investors face a challenge in assessing some GGS+ bonds because of their often simplistic or opaque key performance indicators.

Summary of a story from The Bureau of Investigative Journalism:

HSBC has committed to contribute up to $1 trillion in sustainable financing and investment by 2030. An analysis of the bonds HSBC counts towards its sustainable finance target found at least $2.4bn worth of deals for companies that are worsening the climate crisis. Central to the issue is a relatively new financial product known as a sustainability-linked bond (SLB). SLBs are an ostensibly green type of debt, designed for companies to raise money to fund their transition to more sustainable activities.

Companies that raise funds through SLBs do not face tight restrictions on how that money is used; instead, they agree to certain targets related to sustainability. But these targets are often remarkably weak and the penalties for failing to meet them can be paltry – leaving SLBs as a way for companies to give the appearance of environmental concern while continuing to worsen the climate crisis.

Let's take a look at why this is important...