Rewarding performance through sustainability-linked bonds

Abstract

Green bonds and the broad category of environmental, social, and governance (ESG) debt are market initiatives designed to tie environmental goals to the funding mechanism of the firm. Although there is an evolving certification process for green and social bonds, it does not currently include monetary consequences for a deviation from the proposed green uses of the funding. This article provides an overview of the green/social bond market to highlight these shortcomings. After a review of the green bond literature, we note the shortcomings of the existing debt market and illustrate the benefits of sustainability-linked bonds (SLB), which reward incremental improvements in relevant performance indicators.