Sustainability-linked bonds (SLBs) are becoming increasingly popular among investors as they aim to further develop the key role that debt markets can play in funding and encouraging companies that contribute to sustainability from an ESG perspective.
The International Capital Market Association defines sustainability-linked bonds as “any type of bond instrument for which the financial and structural characteristics can vary depending on whether the issuer achieves predefined sustainability or ESG objectives”. As such, the ESG debt market is growing fast and represents an interesting pool of opportunities for responsible investors.
In this podcast, Ronald Van Steenweghen, fixed income fund manager at DPAM, provides an overview of the ESG debt market and how sustainability-linked bonds fit within this segment.
The main advantage of SLBs is that for a vast amount of companies that do not have the activity profile nor the balance sheet capacity to issue a green/social bond, SLBs can provide an entry ticket to sustainable finance under the condition that these issuers have an overarching and ambitious sustainability strategy.
The challenges ahead are of such magnitude that relying solely on use-of proceeds bonds is insufficient. We will require a lot of investments and funding across different sectors from issuers from different size to make the transition towards a low carbon and inclusive society a success. SLBs are an excellent instrument to create accountability for issuers and their sustainability pledges.
With active management based on specialist ESG and credit research, investing in SLBs can offer numerous advantages: attractive financial potential, wider credit risk diversification, an opportunity to green up your portfolio and also incentivize corporations to achieve real and significant ESG progress.