Sustainable Finance

A New Challenger Has Arrived: Green Bonds vs Sustainability-Linked Loans

Global Initiatives | Jan 08, 2021


Source: Pixabay

This is an original article written by Dennis Tan. 

In November 2008, the World Bank released the first green bond – setting the foundation for today’s green bond market. Since then, over US$13 billion has been raised by the World Bank through almost 150 green bonds in 20 currencies globally for both institutional and retail investors. By the end of the fiscal year 2018, 91 eligible projects generated a total of US$15.4 billion in commitments.

Of these, the largest sectors in the Green Bond eligible project portfolio were Renewable Energy and Energy Efficiency, and Clean Transportation. Together, these sectors made up approximately 7 out of 10 of all Green Bond commitments.

Source: World Bank Green Bond Report 2018

“Investors want a competitive investment, but we see that more investors also want to put their money to have a positive and measurable impact on society,” remarks Heike Reichelt, World Bank Treasury’s Head of Investor Relations and New Products.

Green bonds or Green-washing?

While it is encouraging to see a steady increase in interest among investors in the social and environmental purpose of their investments, green bonds still face many issues, including claims of greenwashing. 

A common criticism leveled at them is the wide variety of projects that can be financed. Due to the loose criteria for defining a green bond, organizations that issue them have the opportunity to use the capital raised for projects that are supposedly ‘sustainable’ but have a nominal environmental impact. For instance, green bonds have been issued in China to fund ‘clean coal’ projects – while appearing to reduce greenhouse gas emissions by burning fossil fuels more efficiently, they fall far from meeting international standards.

This has led to surmountable claims of greenwashing, which is the act of making false or misleading claims about the environmental benefits of a product or service. This is commonplace among issuers of green bonds. For instance, $840 million of green bonds have been issued by the operator behind China’s Three Gorges Dam for wind power projects in Europe. While this seems like something we should celebrate, the dam itself – as well as wind power projects in Europe – have been criticised for damaging local ecosystems and communities.

Yet, many investors still flock to purchase bonds at face-value, overlooking the truth behind their environmental impact.

The rise of sustainability-linked loans

Such issues with green bonds have led to a slowdown in their growth in recent years, and the emergence of new loan types that are diversifying the green finance market, such as sustainability-linked loans.

As opposed to green bonds that specifically finance sustainable projects, the funds from sustainability-linked loans can be used for any purpose. They aim to incentivise borrowers to achieve predetermined sustainability performance targets (SPTs) by tying these performance targets to their loan terms, such as rewarding them with a lowered interest rate upon meeting their SPTs.

Thus, a company is not just engaging in environmentally or socially sustainable projects, it is also benefiting financially when it improves its ESG performance.

“There’s a whole other part of the market: those that need financing but don’t have specific [green] projects in place” notes Dan Shurey, ING’s vice-president of sustainable finance.

Sustainability-linked loans provide an opportunity for banks to incentivise companies to improve business sustainability even if the instruments do not meet green bond market standards.

Sustainability-linked loans are guided by the Loan Market Association Sustainability Linked Loan Principles. According to the Monetary Authority of Singapore (MAS), these principles act as a “high-level framework to guide origination of sustainability-linked loans and provide market participants with a clear understanding of the characteristics of these loans”. 

The scope of sustainability-linked loans: Promising

In July 2019, Cofco International clinched a US$2.3 billion sustainability-linked loan facility from a consortium of 21 international banks – the largest sustainability-linked loan arranged by a commodity trader and the first-ever arranged by a Chinese corporate.

This follows the global growth of sustainability-linked loans, which saw more than US$150 billion in lending in 2019, doubling the amount from the previous year.

On 24 November 2020, the MAS released the world’s first grant scheme supporting green and sustainability-linked loans. Effective 1 January 2021, the Green and Sustainability-Linked Loan Grant Scheme (GSLS) seeks to enable corporates of all sizes to obtain green and sustainable financing, and encourage banks to develop frameworks for small and medium-sized enterprises (SMEs) to obtain such loans.

The GSLS is a key component of Singapore’s upcoming green finance ecosystem to “support Asia’s pivot towards a sustainable future,” said Mr Ravi Menon, Managing Director of MAS. 

Loans are a key source of financing across Asia – be it for individuals, SMEs, or large corporates. Therefore, there is significant opportunity to encourage firms across different industries to transition to more sustainable practices through green and sustainability-linked loans.

In a world of uncertainty, one thing is looking certain: Sustainable finance will continue to play a vital role in the endeavour to address environmental and social issues. Companies need to begin understanding the financial instruments on offer and selecting those that assist them in reaching their sustainable growth objectives. In doing so, companies can then stay sustainably competitive and relevant as we move into a future centered on sustainable development.



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