While bonds remain the staple of the sustainable finance market, a number of new products have entered the space. In particular the “greenification” of finance products has gathered speed: individuals and corporations looking to go green can pick and choose between green debt and investments products supporting their ambitions. Green credit cards, offering economic incentives for eco-friendly behaviours and green mortgages rewarding borrowers for energy efficiency improvements in their home are two examples of personal banking products going green.
In the corporate space, senior unsecured bonds remain the most common green bond format, but other bond types are catching up. Green securitisation, green covered bonds, medium-term notes (MTNs), Sukuk and green loans all saw sharp increases in issuance. Green loans, for example, jumped from $3.1 billion in 2017 to $5.1 billion in 2018. What’s more, the growth of this product suite is likely to boost demand for associated derivative instruments as market participants seek to manage environmental, social and governance (ESG) risks inherent in their portfolio and business operations.
So-called sustainability-linked products have gained popularity during the pandemic, too. “Sustainability-linked” is a relatively new concept in the capital markets, with associated ICMA Principles only released in June 2020, but it has been prevalent in the loan market for almost three years. It requires the issuer to link a bond attribute, typically the coupon, with a predetermined sustainability KPI. Depending on the achievement of the KPIs the bond’s characteristics – usually the coupon rate – are adjusted: if the target is not met, the coupon rate will increase, and if the issuer meets the KPI the coupon rate will be lowered. This route is compelling for firms which don’t want to face restrictions around identifying and maintaining a specific green and/or social pool of assets, or indeed lack tangible assets for such a pool.
Sustainability-linked loans are similar in structure to sustainability-linked bonds. Global sustainability-linked loan volumes have been steadily increasing over the past three years, experiencing an exceptional increase of 168% in volume to $122 billion in 2019, driven both by borrowers looking to show their commitment to achieving sustainability key performance indicators (KPIs), and lenders (banks), bound by the UN Principles for Responsible Banking to facilitate and support environmentally and socially sustainable economic activity.
To further promote the development of such loans and underpin their integrity, the LMA recently published the LMA Sustainability Linked Loan Principles: