Sustainability-Linked Loans and Bonds (2024)

August 24, 2023 (2 min read)

Sustainability-Linked Loans Overview

Sustainability-linked loans are loans where the economic characteristics can vary depending on whether the borrower achieves ambitious, material, and quantifiable predetermined sustainability performance objectives.

The borrower's sustainability performance is measured using predefined sustainability performance targets as measured by key performance indicators and which measure improvements in the borrower's sustainability profile. Along with other forms of finance, such as green loans and green and sustainability-linked bonds and securitizations, investing in sustainability-linked loans is one way for financial institutions to facilitate and support environmentally and socially sustainable economic activity and growth.

The sustainability-linked loan principles are voluntary recommended guidelines that aim to promote the development and preserve the integrity of sustainability-linked loans by providing a high-level framework for determining what constitutes a sustainability-linked loan. For loans to be labeledas sustainability-linked loans under the sustainability-linked loan principles, they must adhere to five key components: selection of key performance indicators, calibration of sustainability performance targets, loan characteristics, reporting, and verification.

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Sustainability-Linked Bonds Overview

Sustainability-linked bonds are any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability objectives. These objectives are metrics tied to predetermined sustainability performance targets (SPTs) as measured by predefined key performance indicators (KPIs), which may include external ratings and/or equivalent metrics, and which measure improvements in the issuer sustainability profile.

The sustainability-linked bond principles are voluntary guidelines that promote transparency and disclosure of information for the issuance of sustainability-linked bonds with the goal of bolstering integrity in the marketplace. The sustainability-linked bond principles are composed of five core components: selection of KPIs, calibration of SPTs, bond characteristics, reporting, and verification. The sustainability-linked bond principles recommend that any KPI selected byan issuer be relevant, core and material to that company’s business operations and strategy, quantifiable, and verifiable externally.

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