Ensuring impactful performance in green bonds and sustainability-linked loans

Abstract

This article examines the revolution of socially responsible approaches to financing in the sustainable debt market, primarily in green bonds and sustainability-linked loans. Specifically, this article considers the risk of greenwashing, and the regulatory governance and contractual mechanisms in place that attempt to ameliorate this risk. The concept of ‘impact’ is also examined to demonstrate the difficulty market participants face in measuring and managing outcomes. To ensure systemic legitimacy and thereby sustained growth in sustainable debt financing, it is contended that contracting parties to these debt instruments need to incorporate performance-based provisions within the relevant legal documentation to better ensure that positive social and environmental externalities are achieved from their investments. Relatedly, market participants must continually strive to develop a comprehensive, tailored understanding of how ‘impact’ is most relevantly measured. A better understanding of ‘impact’ will then inform the contractual targets to be set, as well as provide standardisation for future sustainable investments.

Source: resolved