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Gregor Vulturius, Aaron Maltais, Kristina Forsbacka
2022-02-22
Journal article
Climate targets, Finance

SUSTAINABILITY-LINKED BONDS – THEIR POTENTIAL TO PROMOTE ISSUERS’ TRANSITION TO NET-ZERO EMISSIONS AND FUTURE RESEARCH DIRECTIONS

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:

  1. 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.
  2. Science-based targets should become best practice for climate-related performance indicators and targets of SLBs.
  3. 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;

  1. 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?
  2. How can different bond characteristics incentivize issuers’ sustainability performance?
  3. 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