“ESG” and “Sustainability-Linked” Bonds: Innovations and Challenges

Abstract

The paper focuses on the development in recent years of a wide variety of financial instruments currently in vogue in the international capital markets that have been designed to incentivize and promote sustainable investment, in response to growing investor demand in the face of global concerns over climate change. The key focus is on ‘ESG bonds’ and ‘sustainability-linked’ bonds. Particularly, the paper examines: (i) first, the legal structure of the ESG bonds that have hit the market in the past few years, including an analysis of some of the short-comings that these financial instruments have shown and why the newer ‘sustainability-linked’ bonds have been so successful as a complement to the classic ESG bonds; (ii) second, the legal structure of a typical sustainability-linked bond, as well as the main innovative features of these financial instruments and some of the challenges that issuers and underwriters of sustainability-linked bonds have faced in recent transactions; and (iii) third, a very recent trend in the sustainability-linked bond market: the adoption by sovereign nations of sustainability-linked bonds within their debt offerings.