Steep rise in climate ambition since methodology released in 2023.

Climate Bonds, supported by the Singapore Exchange (SGX Group) and the Inter-American Development Bank (IDB), today releases its first full-length report on Sustainability-Linked Bonds (SLBs), which assesses the profile, structural features, KPI performance, and transition plans of SLB issuance, and makes recommendations aimed at growing a credible SLB market. This first of-its-kind report reveals that the sustainability credentials of many SLBs have been weak and require improvement and introduces a best practice checklist for high-quality SLB issuance. 

While SLBs have faced considerable and valid criticism since their 2021 boom, the problems lie in deficient structural characteristics, calibration issues, and weak transition plans, not with the underlying concept. With greater guidance and commitment to best practices, this market can play a key part in the green transition. 

The SLB model provides a powerful bridge between financial and sustainability performance and presents several benefits for issuers and the broader market. However, the current SLB market contains a high proportion of low-quality deals that lack adequate disclosure, ambition, and credibility. 

Sean Kidney, CEO, Climate Bonds: 

“Sustainability-linked bonds are innovative debt instruments that offer investors influence over climate outcomes at the company level. They can play an enormous part in transitioning the world economy to a greener future.”

“Although SLBs have raised questions over climate impact the market has thus far been operating in the wild west without guidance. The arrival of our SLB Methodology changes this; it offers the much-needed guidance to galvanise investment we are already noticing improvement in market quality.”


SLB Methodology: The sustainability law-enforcer for climate transgressors

In July 2023, Climate Bonds released the SLB Database Methodology (SLBDB) to screen deals for climate alignment with the Paris Agreement (well below 2°C). SLBs are a transition instrument to drive decarbonisation, which is the basis of the requirements for alignment with the SLBDB.

Since market inception in 2018, only 14% of SLBs and 17% of the outstanding volume issued have been recognised as ‘aligned’ after assessment against the SLBDB Methodology requirements. As a relatively new market, SLBs have been operating in the wild west, without extensive guidance on climate best practice. 

Of SLBs issued in 2023, 33% by amount issued was aligned, with this figure being propped up by a strong Q3 and Q4 in which half of SLBs were aligned. This suggests that improved market-based guidance has contributed to an increase in climate ambition and can provide the cornerstone of deal credibility.

Market profile: nascent and diversifying

With just over half a decade since the first SLB was issued in December 2018, the SLB market is relatively young and characterised by a growing and increasingly diversified pool of issuers, with more currencies, countries, and sectors added each year. 

Non-financial corporates dominate heavily (84% of cumulative amount) but different types of public sector entities have started to access the market. 2022 marked an important milestone as two countries issued sovereign SLBs for the first time: Chile and Uruguay.

Top issuer domiciles by amount issued: 

  1. Italy (USD49.5bn, 63% from Enel)
  2. France (USD28.7bn)
  3. Germany (USD23.0bn)
  4. China is fourth (USD21.7bn), but first by bond count (127) and number of issuers (86)


Structural features: more guidance needed.

  • SLBs have used between one and four KPIs; one being the most common with 59% of bonds and 54% of the amount.
  • The selection of KPIs among SLBs broadly reflects the materiality in each sector, but far from perfectly. 
  • Only 14% of SLBs and 17% of the amount issued are aligned with the Climate Bonds SLBDB Methodology requirements. However, the proportion is growing: 33% by amount in 2023. 
  • Coupon step-ups dominate financial mechanisms, featuring in 58% of SLBs representing 77% of the amount issued. The average step-up amount (per target) is 24.8 bps. 
  • Misuse of call options is not currently a big issue but should be monitored (especially when interest rates fall). 

KPI performance: almost all issuers report but quality varies.

  • 48 of the 50 issuers sampled publicly report KPI performance post-issuance, but this often lacks quality: failure to explain reasons for changes in performance, unclear data restatements, and inconsistencies in issuer disclosure are the three key aspects of poor reporting.
  • The market shows heterogeneous performance, with a relatively even split of outcomes (KPI off track, on track, or target currently met).
  • Several targets have already been met, almost all of them with observation dates up to 2025 and most after 2023.

Transition plans: decent quality but wide range observed.

  • There is a clear and strong positive correlation between SLB issuance and the quality of a company’s environmental disclosure. 
  • In Climate Bonds’ assessment of transition plans, the top 50 issuers achieved an average of 17.4 out of 35 points (17.9 weighted by amount), but the range is wide: 0 to 27 points. 
  • Regional differences: Latin American issuers score well. 
  • No low scores among aligned SLBs. 
  • Disclosure of implementation and finance plans frequently lacks quality.

Source: Climate Bonds