Corporate Sustainability-Linked Bonds and the Climate Transition Investigating the Link Between Science-Based Targets and Greenhouse Gas-Related Sustainability-Linked Bonds

Abstract

We examine sustainability-linked bonds (SLBs), a novel phenomenon in the sustainable debt market that has grown substantially during the last years. SLBs are a new type of bond format, distinguished from other sustainable labelled bonds, providing the potential to contribute to the climate transition as proceeds can be used for general corporate purposes while key performance indicators and sustainability performance targets (SPTs) are incorporated into the bond. We try to better understand this potential by examining the extent to which greenhouse gas (GHG)-related SPTs are aligned with science-based targets, approved by SBTi, and incorporated into corporate SLBs that are GHG-related. Our result shows that the majority of GHG-related SLBs did not have SPTs aligned with science-based targets. We suggest that this could harm the SLBs' potential to contribute to the climate transition, increase the concerns of greenwashing risk relating to SLBs, and reduce the current existing sustainability premium offered to SLB issuers. Although our results indicate that the SLB market is moving towards having a higher share of SPTs aligned with science-based targets, European companies and companies in carbon-intensive sectors are lagging. Furthermore, we shed some light on which actors in the sustainable debt market may be responsible for the fact that the majority of GHG-related SLBs do not have SPTs aligned with science-based targets.