Sustainability-linked bonds: Another arrow in the ESG quiver

Bonds would offer governments a financial incentive to make bad decisions

Sustainability-linked bonds, or SLBs, are being heralded as a “rising star of green finance” and “the Hot New Thing” in ESG investing.

Issuances range in valuation from multiple millions in Poland to billions in China and Berlin, Australia, Uruguay and possibly Brazil.

Sustainability-linked bonds are bonds where payments (or absence of payments) are contingent upon whether the issuer achieves a sustainability objective as defined by various ESG (Environmental, Social, and Governance) investment metrics.

ICMA SLB Principles Guidelines (SLBP), considered the “market standard”, describe SLBs as “any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ESG objectives.”

“In that sense,” continue the SLB Principles, “issuers are thereby committing explicitly (including in the bond documentation) to future improvements in sustainability outcome(s) within a predefined timeline.”

If they fail to meet their sustainability targets, they must pay back the bonds at a premium.

What this really means is that SLBs are just another tool for the ESG movement to force “sustainable” policy on companies.

What makes SLBs different from green, social, and sustainable bonds, which have already existed for years? These bonds tie funds to specific projects, while SLBs allow the money to go wherever the issuer sees fit.

“SLBs are much more flexible sustainability instruments,” said David Uzsoki, Sustainable Finance Lead at the International Institute for Sustainable Development, in a webinar with Responsible Investor.

It is through the setting of Key Performance Indicators (KPIs) that measure progress towards Sustainability Performance Targets that SLBs force bond issuers to put their money where their mouth is.

A common environmentalist complaint towards ESG-rated stocks in companies is that these companies have little actual need to push for specific sustainability measures, like emissions cuts. The companies might say that they are pushing for sustainability when they are really only offering token gestures. This phenomenon is called greenwashing. ESG supporters claim that SLBs, therefore, provide a strong financial incentive to issuers to take their green commitments far more seriously.

In the words of Nordea, one of the largest banks in the EU, “the interest terms of the loan give the borrower an incentive to meet certain pre-defined sustainability targets.” Nordea also requires its sustainability-linked loans to “[c]ontribute to combating climate change, for example through the reduction of greenhouse gas emissions or energy consumption.”

How do these incentives work?

SLBs are a sort of “step-up/step-down bond,” where the interest rate paid to bond purchasers can change depending on previously agreed-upon metrics. SLBs work like this: a bond issuer (whether a company, a bank, or a municipality) agrees to a fixed rate (5% for example). However, the issuer promises to fulfill certain environmental or sustainability-focused goals/benchmarks, or SPTs, as measured by the Key Performance Indicators (KPIs). If the issuer is able to hit those goals, for example, decreasing the company’s carbon emissions by 30%, they may only have to pay the bond purchasers a 3% rate. However, should they fail to achieve those objectives, the rate paid to purchasers could increase to 7%.

For instance, as Benoît Morenne describes in a recent Wall Street Journal article, Presidio, a Fort Worth oil company, promised a 50% reduction in greenhouse gas emissions over a five-year period for a shot at lower interest rate payments. “We thought a way that could differentiate us from other people would be being able to get a sustainability-linked bond rating,” said Presidio’s co-CEO Will Ulrich.

All this is to say that there are now explicit carrots and sticks attached to bond issuers fulfilling ESG objectives. In the words of Daniel Murphy, Risk and Resilience Specialist for the World Economic Forum, SLBs allow issuers “to commit explicitly to future improvements in sustainability outcomes while benefiting from discounted interest rates on the bond.”

This is increasingly concerning with the implication that Uzsoki makes: the fact that SLBs, unlike green bonds, allow use of their funds for general corporate purposes, “basically means that issuers now have no excuse whatsoever not to use sustainable debt financing today.”

Of course, there’s nothing wrong with requiring a bond issuer to hit certain KPIs (lenders holding borrowers accountable is a reasonable desire). The problem is the KPIs themselves. The existence of sustainability-linked bonds means that they are exactly that: linked to what ESG advocates define as sustainable. Being linked to the SPTs entails accepting the alleged need for a net-zero energy transition. In the words of the ICMA SLBP, “The SPTs should be ambitious, i.e…. Be consistent with the issuers’ overall strategic sustainability/ESG strategy.”

Why is that objectionable?

Because, in the words of the United Nations, “net zero is entirely incompatible with continued investment in fossil fuels.”

The net-zero transition that seeks to gut fossil fuel use relies on slave labor and keeps developing nations poor.

Net zero will exacerbate the energy crisis, cripple the electric grid, and impoverish the world. It is unfortunate that so many, including investors and politicians, such as Congresswoman Rashida Tlaib, D-Dearborn, have bought into the net-zero ideal. 

Net zero, the ESG movement that pushes for it, and the SLBs that enact it, will ultimately make the energy we need less reliable.

Joshua Antonini is an energy and environment intern at the Mackinac Center. Email him at

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.