Last year was a tough one for debt markets as high interest rates made many issuers and borrowers postpone or downsize their debt issuance, dragging down the sustainable debt market and, in partcular, the issuance of sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs).

Global SLB and SLL issuances in 2023, according to Dealogic data, were US$57.5 billion and US$308.9 billion, respectively, significantly down by 42% and 38% from market peaks of US$99.5 billion and US$499.1 billion in 2021.

With the rising interest in green assets in recent years, SLL and SLB issuances were riding high in 2021, a year which their issuance size skyrocketed approximately 12 and five times over 2020 levels.

Compared with green bonds and loans, whose use of proceeds are strictly ringfenced for specific green targets in specific projects, SLBs and SLLs allow issuers to have higher flexibility in the use of proceeds, to the extent that proceeds can be used for general corporate purposes.

The agreed rates of SLBs and SLLs are to a certain extent variable based upon the issuer’s completion of certain corporate key performance indicators (KPIs), also known as sustainability performance targets, sometimes verified by second parties. SLBs and SLLs also enable more sectors to tap the green debt capital market, such as traditional industrial ones, which otherwise would not have the opportunities to issue green bonds and loans, given that the nature of their business may not be sustainable.

However, the flexibility for issuers and borrowers in SLBs and SLLs also incurred scepticism from the investor side about the rigour and ambition of the sustainability KPIs to which they are linked. This is especially pertinent for SLBs that are traded in open markets.

Greenwashing concerns around sustainability-linked products have made some investment managers exclude such products from their portfolios, notes Nneka Chike-Obi, head of Asia-Pacific ESG ratings and research at Sustainable Fitch, speaking at the 6th ESG Summit held by the Asset Events. In some markets, such as that of South Korea, the SLBs are also under government regulation, making the growth of such products difficult.

A similar problem is also faced by SLLs. But given that SLLs are often done directly between banks and issuers, the parties have plenty of room to negotiate the terms and conditions of the sustainability KPIs, and the relationships between banks and borrowers are often well-maintained. This partly explains why the volumes of SLLs went down less significantly than that of SLBs in 2023. 

Given the market downturn and scepticism, issuers and investors are not completely avoiding SLBs and SLLs from their investment options. A Hong Kong-based investment banker, who recently spoke with The Asset on the value of SLBs in green investment, shares that: “Issuing SLBs has always been the easiest and shortest way for issuers to factor their ESG [environmental, social and governance] issues into their business operations.”

As for SLLs, he adds:  “Almost every big bank now has coverage in SLLs, which illustrates their transformation from something that is a nice-to-have into something that is a must-have”, an indication that both markets will regain their growth potential once market conditions.