Green finance: Sustainability-linked bonds boom as investors demand companies commit to fighting climate change

Name: What is China doing about climate change?
Uploaded: 2021-12-12T05:45:59.000Z
Duration: 6 min 55 s
Description: What is China doing about climate change?

Borrowers have to set performance targets that carry a penalty in the form of a higher coupon or interest rate if they are not met

Financial products linked to sustainability are the true test of a company’s green ambitions, says UBS

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Since the first SLB was issued in 2019, issuance had reached US$8.2 billion globally last year. It has now ballooned over 11 times to US$92.9 billion. Photo: Shutterstock

Martin Choi

Published: 1:45pm, 12 Dec 2021Updated: 8:45pm, 15 Dec 2021

Financial instruments linked to sustainability will form the next phase in the evolution of green fundraising in Asia, as investors demand companies show their commitment to fighting climate change, according to Swiss bank UBS.

Whereas green bonds designed to fund projects that are environmentally friendly are a “test of the waters” for firms in the sustainable finance space, the more ambitious companies will be looking at issuing sustainability-linked products, said Tasos Zavitsanakis, executive director of the sustainable finance office in Greater China for UBS in an interview.

Borrowers of sustainability-linked instruments need to set predetermined sustainability performance targets that are both relevant and important. If the targets are not met, the debtors will have to bear a penalty in the form of a higher coupon or interest rate.

“It’s about them demonstrating their commitment, to an extent that it’s an incentive for them to meet their targets. If you don’t meet your targets, you’re going to have to pay a higher coupon or to buy carbon credits,” said Zavitsanakis.

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What is China doing about climate change?

Once companies start putting in place a “credible” transition plan for their business to fight climate change, “naturally [they] can link that to a sustainability-linked commitment. It becomes an evolution,” he said.

Since the first sustainability-linked bond (SLB) was issued in 2019, issuance had reached US$8.2 billion globally last year, according to financial data provider Refinitiv. It has ballooned over 11 times to US$92.9 billion this year.

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