Sustainability-linked bond

Definition

A sustainability-linked bond is a bond whose financial characteristics — most commonly a coupon step-up — depend on whether the issuer achieves predefined sustainability performance targets by set dates. Unlike use-of-proceeds green bonds, which ring-fence funds for eligible projects, SLB proceeds finance general corporate purposes, so credibility rests entirely on the targets: the ICMA Sustainability-Linked Bond Principles require material key performance indicators, ambitious calibrated targets, disclosure in the bond documentation, annual reporting and independent verification. The design lets issuers without large eligible asset pools access sustainable finance, but it has attracted criticism where targets proved weak or already nearly met, pushing ICMA and the loan market's SLLP toward stricter guidance on ambition and baseline selection.