Issuers of sustainability-linked bonds could step up efforts to enhance investor confidence

SLBs have gained strong traction with improved issuances since it was first introduced in 2019. SLBs grew significantly higher in 2021 after the International Capital Market Association (ICMA) released the Sustainability-Linked Bond Principles (SLBP) in June 2020 which encouraged more issuers to tap the SLB market.

Despite strong issuance growth, investors’ views on SLBs are still polarized. Some investors have remained cautious about these instruments amid concerns over credibility and greenwashing risk. These concerns have led the ICMA to release further guidance in June 2022 with an updated registry of approximately 300 sustainability key performance indicators (KPIs) for selected sectors and a supplementary question and answer (Q&A) to address queries on SLBs.

Additionally, investors’ concern also led to the development of newer structures like the “use of proceeds SLBs” which combines the fundamentals of green bonds and SLBs. Although still nascent, investors consider these hybrid instruments to provide the benefits of both worlds — transparency, certainty and accountability.

The call for action to improve the credibility of SLBs is pivotal, as weak structures will impact an issuer’s ability to access new pools of capital, especially from leading ESG investors. SLB structures with loose sustainability performance targets (SPTs) could undermine an issuer’s reputation and future refinancing needs. Weak investor demand for SLBs also exposes arranging banks to underwriting risks.

For the SLB market to develop further, robust discussions amongst issuers, investors, lead arrangers, and underwriters are crucial to address credibility gaps which will help tighten and improve these debt instruments.