Investor appetite drives pricing benefits for Sustainability-Linked Bond

According to a report published by the Climate Bonds Initiative (CBI), the Sustainability-Linked Bond (SLB) market has boomed since China-based infrastructure company Beijing Infrastructure Investment Co. priced in first instrument in 2018 with a coupon increase linked to the achievement of social KPIs. At the end of the first half of 2022, CBI recorded SLB volumes of 176.6 billion dollars.

CBI reviewed qualifying SLBs issued in year 2021 and the first half of 2022 to determine if there was evidence of a “greenium” (green premium that benefits the bond issuer). Within the sample of 37 SLBs, 14 achieved a greenium (11 denominated in USD and three in EUR). Eleven of the SLBs that earned a greenium were listed in 2021 and three in 2022.

Unlike typical green bonds, SLBs come with no restrictions on the use of proceeds, and instead issuers commit to improving environmental performance at the entity level using KPIs. According to the report, the increased growth of SLBs is accompanied by growing concerns about greenwashing. Therefore SLB standards and certification will be essential to improve trust and transparency, which in turn will allow further growth in that market.