The Covid-19 pandemic has accelerated and strengthened the interest of different stakeholders in sustainable investment. The transition toward sustainability in financial markets has been gaining momentum and this is reflected clearly in green bond issuance in 2021. Increasing investor demands and government mechanisms for checks and balances in ESG disclosure stimulate businesses to develop innovative ESG structures.
Apart from traditional green bonds which specify certain points of environmental focus and projects, sustainability-linked bonds (SLBs) offer greater flexibility for more ambitious corporates, in alignment with their long-term sustainable strategies. In a consumer-driven market, tangible outcome provides better visibility for investors to measure business growth and improvements. With ESG performance targets embedded in SLBs, issuers commit to achieve future improvements in sustainability. Companies can also look beyond direct climate-related issues and tackle sustainable or social problems using SLB as a sustainable instrument. Issuers in earlier stages of transition into a more sustainable business model can restructure while following guidelines, using the flexibility that SLBs provide.
Despite flexibility and fewer restrictions on using proceeds, SLBs require more management time, resources and efforts to ensure targets being set are achieved and to prevent potential greenwashing. More interactions at the management level are required to influence and drive behavioral changes within the company itself. Explaining the rationale behind the issuance and targets can provide better justification for both investors and the company.
Nevertheless, SLBs and traditional green bonds are not mutually exclusive for corporates or investors. In fact a combination of the two can provide more options for investors and flexibility for long-term development and transition. With investors putting more emphasis on supporting sustainable investment, there will be a growing number of sophisticated products and tools to boost sustainable development. It is expected that green bonds will still prevail in the market at least in the near future, but SLBs are nonetheless on the rise and are being increasingly adopted by more and more corporates.
