Green finance: Sustainability-linked bonds boom as investors demand companies commit to fighting 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
“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.
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.
The sustainability-linked features are appealing to institutional and family office investors that are “really serious about allocating assets into sustainable kinds of investing”, said Amy Lo, co-head of UBS Wealth Management, Asia-Pacific, in the same interview.
“It’s actually tougher for the issuer to issue the sustainability-linked bond … you have to meet the targets, otherwise you get a penalty.
“We have some investors who are really buying into it, because they feel the company is more serious about delivering what they pitch they are.”
“Investors with a sustainable focus … not only look at whether they would get higher returns for those instruments, but also whether their money is really encouraging and incentivising the issuer to do a better sustainable performance,” said Gan Luying, head of sustainable bonds in HSBC’s Asia-Pacific debt capital markets team. She was speaking at Fitch Ratings’ ESG Outlook Conference Asia-Pacific last Wednesday.
Sustainability-linked loans (SLL) with penalties are also gaining traction in Asia, showing that companies are more confident in setting and reaching their climate ambitions, according to Tracy Wong Harris, Standard Chartered’s head of sustainable finance for Greater China and North Asia at a media round table late last month. Common penalties included tiered interest rates, purchase of carbon credits or donations to charities that serve environmental or social causes.
The transaction volume of SLLs for Standard Chartered in Hong Kong grew by over three times in the first nine months of the year, compared to the whole of 2020, according to Harris.