Sustainability Linked Bonds Part 1: An Introduction

By Richard Howard

From getting individuals to use their cars less often to persuading companies to build more renewable energy infrastructure, there are many different ways to convince people or groups of people to change their ways.

Sustainability-linked bonds are potentially able to solve a persistent issue in the ESG, green, and sustainable finance world: how to further incentivise sustainable behaviour beyond simply categorising financial investments as ‘green’ based on where the money goes?

In June 2020 the ICMA (International Capital Markets Association) released a report called Sustainability-Linked Bond Principles. This report provides guidelines for companies and individuals involved in world of financial bonds, which:

“aim to further develop the key role that debt markets can play in funding and encouraging companies that contribute to sustainability” [1]

These guidelines are voluntary, but if implemented across the industry could create a whole new class of sustainable financial products.

How Do Sustainability-Linked Bonds Differ From Regular Bonds?

A bond is a method that companies and countries can use to raise debt. All bonds have three key elements:

  1. A principal: the amount of money an issuer borrows from a creditor/investor: e.g. £100m
  2. A coupon or interest rate: the amount of interest paid per year on the value of the principle: e.g. 5% = £5m of interest repayments per year
  3. A maturity date: the date at which the principal must be repaid in full: e.g. 31/06/2025

Bonds differ from loans in two key ways: firstly a bond’s principal is repaid at the maturity date, whereas a loan’s principal is paid off gradually alongside the interest; secondly bonds can be bought and sold, much like shares, on secondary markets much more easily than loans [2].

With a sustainability-linked bond the concept of the maturity date and the principal remain broadly the same, however, the coupon can vary depending on whether or not certain sustainability-linked targets are met. Note – the concept of sustainability-linked loans also exist [3].

The First Sustainability-Linked Bonds

The giant Italian electricity generator and natural gas distributor Enel SpA raised the idea of sustainability-linked bonds with potential investors in September 2019. Enel advertised them with respect to the UNs Sustainable Development Goals (SDGs) and called them SDG-linked bonds [5]. The total bond raise was for €2.5bn split into three tranches (€1bn + €1bn + €0.5bn). The first two were aligned to SDG 7 – Affordable and Clean Energy – and the final one was aligned to SDG 13 – Climate Action. [4].

By way of a demonstration let’s focus on the SDG 13 bond, which has a €500m principal, a 1.125% coupon and matures on 17/10/2034 (€500m 1.125% 17/10/2034 shorthand). The sustainability performance target (SPT) attached to the bond is: “Greenhouse gas emissions are to be equal to or lower than 125g of CO2 per kWh of energy generated by 31 December 2030” [6].

If that target is not met then a “step up provision” is provided in the fine print of the bond, whereby the coupon of the bond will increase (or step up) by 0.25% in 2031 if Enel fails to provide evidence that the SPT has not been met. Therefore, the annual cost of ‘servicing the debt’ (i.e. paying the coupon) will increase from €5.6m to €6.9m.

As per the terms of the bond, Enel are obliged to produce a sustainability report, which details the direct greenhouse gas emissions for 2030. This report must contain with it an assurance report produced by an external verifier. Failure to produce the assurance report will trigger the step up provision.

For the other 2x €1bn bond tranches, which have maturity dates in 2024 and 2027, the sustainability performance targets were “The Renewables Installed Capacity Percentage as of 31 December 2021 being equal to or exceeding 55% , as confirmed by External Verifier” [5].

Next Steps

When Enel released the bonds to the market in early October they found that the issue was four times oversubscribed [4]. That is, there was €10bn worth of orders for €2.5bn of bonds, highlighting that there is serious demand for these novel sustainable finance products from seasoned sustainability players – Enel are already a large player in the existing green bond market.

Soon after the bond issue the ICMA started a working group to create some guiding principles for sustainability-linked loans. By taking stock of the Enel bond issue ICMA are trying to head off many of the potential problems created by sustainability-linked bonds and simulate further issuance [6, 7].


Sustainability-linked bonds are a new form of green finance and sustainable finance, which will have its role to place in the Great Decarbonisation. However, despite the potential benefits, it is not a given that these bonds will be the silver bullet that will bring clear and concise climate-related finance.

This will be the topic for part two in the series.


  1. ICMA, Sustainability-Linked Bond Principles, Voluntary Process Guidelines, 2020,
  5. Enel SpA, Enel’s General Purpose SDG Linked Bond – Context and Principles, 2019,
  6. Linklaters, ICMA’s Sustainability-Linked Bond Principles align with ENEL issuance, 2020,

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