Sustainability-Linked Bonds and their Role in the Energy Transition

Sustainability-Linked Bonds (SLB) have rapidly emerged as an alternative financing instrument to Green Bonds, particularly for firms in the energy and hard to abate sectors. In this paper we review the design, economics and environmental impact of SLB. We discuss the main features of SLB particularly the embedded financial incentives for firms to reduce their carbon emission and align towards decarbonization strategies via the achievement of specific targets. Similar to Green Bonds, SLB can provide investors with opportunities to invest in green instruments and support firms in their energy transition by providing an alternative instrument to green bonds. However, the general purpose structure of SLB as well as the specific design of SLB’s financial incentives require additional efforts for investors to separate between reliable environmental signal and greenwashing.

By: Andrea Maino