Sustainability-linked bonds: The future of Finance in India

A green bond is, simply, a fixed-income instrument that is earmarked to raise money for climate and environmental projects of an enterprise. Green bonds are attractive because they ensure tax incentives. The proceeds have to be channelled to facilitate a climate related project only. Some of the examples can be green bonds issued by Adani Green Energy and Swiss Prime Site AG. In India, the first green bond was issued in 2015 by Yes Bank.

On the other hand, Sustainability linked bonds, according to International Capital Market Association (ICMA), are types of bond instruments for which the financial and/or structural characteristic can vary depending on whether the issuer achieves predefined sustainability objectives. The proceeds are not ring-fenced to climate or green projects but can also be used for general corporate expenses, provided the defined objective is achieved. Taking UltraTech's example, the proceeds from SLBs shall be used for refinancing existing rupee-denominated debt, ongoing capital expenditure requirements and general corporate purposes. Under firm's Sustainability Performance Target (SPT), it aims to reduce 22.2% of carbon emissions for every ton of cementitious material it produces by March 31, 2030 from the levels of March 2017. If UltraTech failed to meet the set objectives, then it shall have to face financial penalty by increasing the interest payable on the bond by 0.75%.

Therefore, the key difference between the two is the manner in which the proceeds shall be utilized.

It is also essential to understand the benefits and drawbacks of SLBs in the Indian market in comparison to the green bonds.


Unlike traditional green and social bonds, SLBs do not restrict the issuer on how the funds collected have to be used. This flexibility allows a broader universe for the issuers to obtain sustainable financing. Moreover, it also acts like a pledge to improve the performance against tailor-made ESG targets. It also helps the companies that do not have a separate green project to collect funds by laying a holistic and positive impact on the society. For instance, there are many firms in the consumer sector that face difficulty in finding sufficient green projects to issue green bonds. Compliance with the sustainability goals and translation of ESG ratings to stock performance also allows the issuer to comply with the interest of shareholders. Moreover, the KPIs that need to be disclosed to show ESGs shall already be a part of firm's reports, ensuring less compliance burden on the issuers. The handbook on the Sustainability-Linked Bond Principles published by ICMA provides an exhaustive list of the procedure, the nature of KPIs and the components of SLBs. It provides competitive factors to ensure that SLBs not only be beneficial for issuer but also for the society. For instance, a Second Party opinion assessed the ambition and relevance of the SPT by comparing it to company's past performance and industry standards. On the other hand, the performance of green bonds is only assessed after the completion of the project, leaving a scope for uncertainty. Thus, these benefits of SLBs makes them a lucrative option in comparison to the green bonds. However, like a coin has two sides, the drawbacks also have to be assessed.


The first limitation of SLBs is in terms of risk and uncertainty. The company might not be able to fulfil its pre-determined sustainable goals and will have to end up returning money earned by way of bonds along with the penalty, giving rise to an ethical dilemma. Green bonds, on the other hand, are certain and have to be used for a specific purpose only. Moreover, once the enterprise attains its target, it is free to collect funds and use them for any purpose. The issuer is not yet obligated to be accountable to the public and can deploy the funds as per its whims and fancies. These ethical considerations are subjected to individual judgment but this misalignment of the system should be addressed.


The author shall conclude by saying while SLBs help in meeting the sustainable goals of the enterprise laying a positive societal impact, the ethical dilemma that arises because of the mechanism needs to be addressed. On the other hand, if an investor simply wishes to channelise his/her funds to a certain ‘green goal', then green bonds shall be a viable option. SLBs are on the rise in the world and thus, shall hold the pace in the Indian market also. Moreover, SLBs, being the efficient gateway to fulfilling sustainable gaols, shall also help the small-scale firms in joining the movement. It is a better alternative for financing and might also become the future of fund collection in India.          

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