As businesses look for ways to reduce their carbon emissions, a growing number of companies find themselves needing to raise capital. Against this background, SLBs have been hailed as a flexible instrument as they do not directly link income to a specific project, unlike other securities such as green, social and sustainable bonds. In other words, the capital raised with SLB is tagged for general purposes only.
How popular are stability-linked bonds? According to data compiled by Bloomberg (source 1), their global volume has been nothing short of booming. From around US$11 billion in 2020, the issue increased to US$103 billion in 2021.
“This is a more meaningful way of transitioning for energy companies because green bonds may not apply to their overall strategy. It can help a company progress and open up the market to other industries,” said Diane Young , Senior Portfolio Manager, Fixed Income and Co-Head, Corporate Bonds, Addenda Capital. “In addition, by linking bonds to company-wide goals, it enables issuers and investors to achieve objectives. while climate-related goals are aligned.”
More specifically, SLBs are “any type of bond instrument for which financial and/or structural characteristics depend on whether the issuer achieves predetermined stability/ESG objectives,” writes the International Capital Market Association. , which has published its sustainability-linked bond principles. in June 2020 (source 2). It adds, these objectives should be measurable key performance indicators (KPIs) and evaluated against predetermined goals.
A common feature of the SLB is a coupon payment that varies depending on whether those goals have been achieved. For example, if a company fails to meet emissions reduction targets, the planned payments to security holders will increase by a predetermined amount.