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MARKET INSIGHTS - SLB: A New Financial Instrument in ESG Investments

An examination of an innovative financial instrument that connects sustainability and yield in the bond market

In this report, the ESG investments team illustrates Sustainability Linked Bond (SLB), a new type of sustainable financial instrument that over the years has become increasingly popular, covering a growing percentage of the total issuance of ESG bonds.

Firstly, we introduce the classic ESG instrument, focusing on the four core components identified by ICMA principles. The peculiarity of these bonds is that their issue is closely linked to the implementation of a sustainable project, green or social, which will be financed through these funding.

Consequently, we can understand the innovations brought by Sustainability Linked Bonds; this financial instrument is more complex than those described above. Their issue is no longer linked to a specific project, but to more Sustainable Performance Targets (SPTs) measured through Key Performance Indicators (KPIs). The complexity of this instrument is also due to the presence of clauses, that affect the coupon or redemption (i.e., step-up clauses on coupon).

In the final part of the report, the advantages and disadvantages of this instrument are analysed and some of our considerations on how the flexibility of this bond could be exploited are expressed.

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