The sustainable finance market surged in 2018, with a record $247 billion worth of sustainability-themed debt instruments raised during the year, according to research company BloombergNEF (BNEF). Green bonds issuance amounted to $182.2 billion in 2018, whereas one new product, sustainability-linked loans reached $36.4 billion.
The sustainable debt market is comprised of labelled bonds and loans that finance projects with green benefits, social benefits or a mixture of both. Many investors target these debt offerings in order to meet their own objectives or mandates on environmental and social impact.
The focus of the market has historically been on green bonds, which were first used by European banks around 2007 to finance clean energy projects and have since also been issued by governments and a wide range of industrial businesses. While green bonds continue to make up the largest part of the market, attention is now shifting to a broader range of sustainable bonds and loans.
As a result, growth in green bonds slowed to 5% in 2018 YoY compared to 68% in 2017 while sustainability-linked loans, surged 677%. Sustainability-linked loans are term loans or credit facilities that come with a sustainability pricing mechanism. The pricing mechanism is typically tied to the sustainability score or performance of the borrower, which can go up or down.
For example, in November 2018, French electricity utility EDF agreed to a 4 billion-euro facility with pricing indexed to the group’s key sustainability performance indicators. If the company underperforms against its targets, then the margin of the debt facility will increase, and if it outperforms, the margin will decrease.
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