This article comments on the potential of sustainability-linked bonds, (SLBs), to contribute to the decarbonization of the real economy and proposes directions for future research.
Sustainability-Linked Bonds are the newest addition to the growing market of sustainability-themed debt instruments. In this commentary the authors conclude that SLBs surely have the potential to contribute to more investments in zero emission activities: However, for SLBs to truly accelerate the decarbonization of the real economy at the speed that is needed will depend on several issues:
- Actors in the SLB market need to arrive at a common understanding of economic activities that have a material contribution to climate change and that need to see ambitious performance improvements to achieve full decarbonization.
- Science-based targets should become best practice for climate-related performance indicators and targets of SLBs.
- The extent to which SLBs can offer issuers with a lower cost of capital to transition their business depends on the perception and preferences of investors.
The authors also highlight 3 key questions that future research should investigate in this area;
- What is the climate-related additionality of SLBs – i.e. what is their ability to promote transitional activities and progress on emission-reduction targets that would not have otherwise happened?
- How can different bond characteristics incentivize issuers’ sustainability performance?
- Research should in addition assess the governance system of the SLB market, its interdependencies with market-driven and regulatory changes promoting sustainable finance, and its ability to redirect capital flows towards decarbonization
Gregor Vulturius, Aaron Maltais & Kristina Forsbacka (2022): Sustainability-linked bonds – their potential to promote issuers’ transition to net-zero emissions and future research directions, Journal of Sustainable Finance & Investment, DOI: 10.1080/20430795.2022.2040943