Logo gray

Sustainability-linked bonds: a key to ensure Europe's green ambitions?

According to the experts, the energy crisis we are experiencing, which is closely linked to our dependence on fossil fuels, strengthens rather than diminishes the case for a rapid energy transition. Due to this fact, the sustainable finance can play a key role by moving the capital towards green investments. The global issuance of green, social and sustainability-linked bonds and loans were around USD 1.7 trillion in 2021 but according to the plans, it will increase in the next years. The lion’s share of the sustainable financing instruments is the green bonds today, which are useful tools to mobilize investments for companies that already have a segregated sustainable business they would like to develop. However, this type of approach confines sustainable finance to a niche and hampers its full development.

With the idea of going beyond this vision and making sustainability the new norm, Enel has come up with a completely new tool: the first bonds linked to the achievement of the SDGs (Sustainable Development Goals).  The new sustainability-linked bonds are related to the overall environmental performance of a company. Sustainability-linked bonds come with specific targets or key performance indicators (KPIs) (e.g. air or water pollution, the circular economy or biodiversity), related to a company’s loan. If they meet their targets, the interest paid on their debt will be lower, encouraging companies to move in a green direction. The market for sustainability-linked bonds hit the symbolic $100 billion mark in 2021, one year after their launch, representing spectacular growth.

However, on the other hand, if the issuers wish to maintain credibility in the market for sustainability-linked bonds, they need more self-discipline and set targets or KPIs which are not too easy to meet. A voluntary standard for SLBs would help to improve transparency by introducing minimum requirements on these bonds. In addition, the proliferation of green finance instruments ultimately poses a risk of greenwashing or false environmental claims by companies. Europe should now focus its efforts on removing obstacles to the rapid development of a developed sustainable finance market, since the sustainable finance could be key for Europe to realize its green ambitions and emerge from the crisis faster.