Sustainability-linked bonds – their potential to promote issuers’ transition to net-zero emissions and future research directions

Sustainability-linked bonds (SLBs) promise to complement the use-of-proceed model of green bonds by tying general purpose debt finance to issuers’ sustainability performance against predefined targets. In this commentary, we highlight that the potential of SLBs to promote issuers’ climate transitions crucially depends on a common understanding of eligible economic activities and material performance indicators, the use of science-based targets as best practice, the ability of borrowers to dispel concerns about greenwashing risk, and bond characteristics that set meaningful incentives for issuers to improve their carbon performance. Future research should investigate the climate-related additionality of SLBs, assess if bond characteristics and changes in capital costs support issuers in meeting or even increasing their climate targets and deter unsustainable investments, and better understand the challenges and opportunities for the SLB market to bring about system-level innovation to the financial system.