Achieving your goals in finance often involves aligning incentives with your desired outcome. This is an area where traditional green bonds have fallen short. Companies have been issuing green bonds for years with promises to use the money on projects like solar energy or decreasing emissions. Many of the companies did follow through on those promises, but there was nothing to really hold them accountable.
Enter sustainability-linked bonds. These bonds tie the coupon rate (interest payments) to specific, measurable targets. If the targets aren’t met, the company must pay bondholders a higher interest rate. A recent bond offered by TELUS, a Canadian telecom, pays 2.85% per year over ten years if they reduce greenhouse gas emissions by 46% from 2019 levels by 2030. If they fail to do so, the interest rate goes up 1% per year.
I hope we see more of this in the coming years. It better aligns the incentives for issuers of green bonds with what their investors are hoping to accomplish. It also changes the perception of green bonds from something that makes you feel good to something that incentivizes positive environmental behavior.
About the Author: John O’Connor
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