Exploring Sustainability-Linked Bonds: Insights from ICMA
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 International Capital Markets Association (ICMA)'s perspective, we sat down with its Deputy CEO and Head of Sustainable Finance, Nicholas Pfaff.
Why was a new type of sustainable bond deemed necessary, leading to the creation of the Sustainability-Linked Bond Principles (SLBP)?
How do SLBs compare to transition bonds?
The SLBP was launched in 2020 to complement the project focus of use-of-proceeds bonds (green, social, and sustainability bonds) with a new approach focused on tracking the overall sustainability performance of an organisation with reference to performance targets and KPIs.
Sustainability-linked finance is an innovation that originated in the loan markets which ICMA adapted for the bond markets. Sustainability-linked bonds (SLBs) were also launched with the intention to provide a product that could prove especially useful to invest in the transition trajectory of corporates.
This was, however, not the exclusive purpose as SLBs can track a variety of sustainability objectives. It’s otherwise important to note that the Principles have a holistic approach to transition based on recommended disclosures and an organisation level strategy.
This guidance is contained in the Climate Transition Finance Handbook (CTFH) also originally released in 2020. The CTFH explains that transition is a theme that can be financed by SLBs and by use-of-proceeds bonds whether labelled as green bonds or “transition bonds”.
How does ICMA support the SLB market?
ICMA supports the SLB market with regular updates of the SLBP as well as of the Illustrative KPIs Registry which includes high-level recommendations as well as examples for the selection of KPIs for SLBs.
In June 2024, the registry was enriched with additional KPIs related to environmental themes (biodiversity, circular economy/raw materials and water) and a selection for sovereign issuers.
ICMA also makes available a dedicated section of the Guidance Handbook which is kept current, as well as a data disclosure checklist and an information template. Finally, ICMA provides market analytics and issuer information in a public database, which is powered by the LGX DataHub.
How do you envision the SLB market evolving over the next few years?
The SLB market contracted significantly in 2024 with total issuance at USD 38 billion, marking a 41% year-on-year decline.
Nonetheless, the market also saw significant support from both historical issuers such as ENEL and SNAM, and new ones including Thailand in the sovereign space.
We continue to believe that it is a very important product especially, but not only, suited to finance transition. There were controversies in earlier years focused on SLBs that were perceived as unambitious. However, our research published in 2023 showed a positive trend with respect to ambition as evidenced notably by growing Science Based Targets initiative (SBTi) alignment.
Arguably, the market also underestimated early on the relative complexity of SLBs compared to use-of-proceeds bonds. We believe that the current state of the market reflects a better understanding of the product and a focus on quality over quantity, and we remain positive about the outlook for SLBs in the coming years.
