Room for improvement
Unlike green bonds, SLBs allow the issuer to set more general sustainability goals, usually a pre-defined sustainability or ESG performance targets, or KPIs (key performance indicators).
“We are expecting SLBs with KPIs more closely aligned with the issuer’s attainment of net zero targets. This will be increasingly important as issuers look to demonstrate to investors the progress they are making towards net zero,” Morton said.
“We have already seen some examples in the European Investment Grade space, but we see potential for this to become as pervasive as the green bond over the next few years.”
Although green bonds, and their related cousins, such as SLBs, are useful components for investors, the market is far from perfect.
Problems include a lack of transparency, greenwashing and overstated claims of environmental credentials, said Sykora.
Adaptation: a growth area
Research shows that only 20% of climate financing is committed to adaptation2, which encompasses the adjustments in ecological, social, or economic systems that will be needed to respond to actual or expected changes to the climate (as compared with mitigation, or actions to limit global warming and its related effects).
“A low percentage of green and sustainable bond issuers are focused on adaptation, Invesco’s Global Head of ESG Cathrine de Coninck-Lopez said at a recent event. “We’re encouraging issuance for adaptation.”