Exploring Sustainability-linked Bonds: Insights from PIMCO
To mark the release of the Luxembourg Green Exchange (LGX)'s latest market intelligence study on the state of the sustainability-linked bond (SLB) market, we reached out to a number of industry experts to get their thoughts and insights.
To hear more about the SLB market from the investment management perspective, we sat down with Samuel Mary, Senior Vice President & ESG Research Analyst at Pacific Investment Management Company (PIMCO).
What are the primary factors driving investor interest in SLBs?
There continues to be a growth of investors that seek to reduce risks and capitalise on opportunities related to sustainability factors. Sustainability-linked bonds (SLBs) may support the assessment, management and engagement on these drivers, as well as portfolio optimisation for strategies with sustainability objectives.
For example, they may motivate businesses to improve their sustainability performance, which for environmentally sensitive sectors typically means reducing greenhouse gas emissions and other externalities. They may also:
- Encourage issuers to set targets aligned with global benchmarks, in particular the Paris Agreement on climate change and the UN Sustainable Development Goals (UN SDGs)
- Enable more issuers to access ESG-labelled bond markets, including those with lower direct capital expenditures that would qualify as green expenses for use of proceeds bonds, i.e., green and sustainability bonds
- Allow investors to diversify across geography, bond maturity, industry, or bond rating
Could you elaborate on how PIMCO assesses the credibility of the sustainability targets set by SLB issuers?
How important are external reviews and the penalty/reward mechanisms in your decision to invest in SLBs?
Our framework builds on our Best Practice Guidance for Sustainable Bond Issuance for Corporate and Sovereign, and ICMA’s Guidance including its Sustainability-Linked Bond Principles (SLBP) and accompanying documents such as its Guidance handbook that includes a Q&A. It assesses these instruments both prior to and after issuance, mapping them across a spectrum based on three criteria:
- Strategic fit: Alignment of the issuers’ climate/environmental/social strategies with the bond’s targets, and both the ambition and the credibility of these targets
- Bond structure e.g. interim targets/trigger date, penalty/reward, and whether they lead to a meaningful and commensurate variation in the financial and/or structural bond characteristics relative to the issuer’s original bond
- Red flags and reporting: Screening for “red flags” and controversies and analysis of reporting and process (misalignments to market standards such as ICMA's SLBP)
What recommendations would you offer to SLB issuers to make their bonds attractive to investors like PIMCO?
ICMA’s guiding principles have improved the SLB market’s credibility by encouraging more transparent disclosure and reporting. Clear progress has taken place and there are more and more examples of quality SLBs and sustainability targets.
However, the room for improvement is undeniable in certain instances. We highlight possibilities for issuers to bolster SLB structures:
- Introduce shorter trigger dates for evaluating whether a KPI target has been met in recognition of the need for near-term progress on climate action in particular
- Build milestones into their Sustainability Performance Targets (SPTs) and provide legal documentation to demonstrate progress throughout the lifespan of the bond such as ensuring the issuer’s most recent and ambitious KPI and SPT targets will automatically apply to all outstanding bonds using the same KPI and SPT definition
- Provide external verification of the historical performance for KPIs prior to issuance, along with the KPI calculation methods and data quality based on recognised standards (e.g., Food Loss and Waste Protocol, and the Oil and Gas Methane Partnership for methane emissions)
- Follow practices in line with typical covenants for bonds not labelled as sustainable to facilitate the mainstreaming of the instrument and its connection with credible and ambitious targets (e.g., meaningful and commensurate coupon step-up rather than charitable donations, and inclusion of material and relevant metrics based on recognised sector materiality matrices. This involves incorporating broader KPIs than greenhouse gas emissions where applicable)
We believe SLBs sit well alongside the well-established use-of-proceeds markets, and we will continue to evaluate new deals based on our proprietary evaluation framework for ESG-labelled debt while partnering with issuers to support best practices.
Most encouraging for us is the wide set of issuers choosing and considering issuing SLBs.
_______________
Important Information
OUTLOOK
Statements concerning financial market trends and portfolio strategies are based on current market conditions, which will fluctuate. Outlook and strategies are subject to change without notice.
PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed.
PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Via Turati nn. 25/27 (angolo via Cavalieri n. 4) 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie-Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2025 PIMCO.
