Sustainable finance
Sustainability-Linked Derivatives
Derivative instruments whose pricing or payoffs vary with sustainability performance — the frontier of sustainability-linked finance.
Definition
Sustainability-linked derivatives are derivative contracts — interest rate swaps, FX forwards and others — whose terms vary with the achievement of sustainability key performance indicators by a counterparty, typically offering a pricing benefit for meeting targets (and sometimes funding charitable payments when missed). They extend the sustainability-linked logic of loans and bonds to hedging instruments, letting a company align its entire capital structure — debt and derivatives — with its transition targets; ISDA has published KPI guidance to standardise practice.
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