A rarely used financial product that makes it easier to monitor the performance of sustainable projects has been endorsed as a reliable way to avoid greenwashing in the $4-trillion eThe idea combines green debt, where proceeds are broadly used to fund environmental projects, with sustainability-linked bonds , where the amount of interest an issuer pays depends on whether it meets specific sustainability goals.
Currently, “there is very little in the green bond market to tether companies and governments to their promises [so] you could end up supporting an inherently non-green issuer”, said Karim Henide, a fixed-income portfolio manager at Record Currency Management, who has researched the hybrid structure. By comparison, green SLBs “are a panacea for the market, setting a gold standard for green debt architecture”.
Green SLBs “are a natural progression of the market”, said Amrita Ahluwalia, a managing associate in Linklaters’s capital markets team. Arthur Krebbers, head of corporate climate and ESG capital markets at NatWest Markets, added: “However, this is likely to remain a distinct niche as it entails significantly more upfront and ongoing time and resources to maintain.”
“Although still nascent, investors consider these hybrid instruments to provide the benefits of both worlds,” said Wai Ming Chang, an energy finance analyst on IEEFA’s debt markets team.