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May 23, 2022

Your View: Regulators need to look at new sustainability-linked debt, not green bonds

From Jonny Mulligan, The Martello Advisory

In response to your article “Green bond proposals could hamper issuance, EU warned” (May 18), the point is not whether the EU green bond standard would end up reducing the size of the market. The point is that, as it is, this market does not help address climate change.

Green bonds aren’t designed to tackle the overall need (for companies and economies) to reduce carbon emissions, the effects of climate change, and biodiversity impacts. Green bonds only look at specific, isolated projects. They do not automatically direct capital to companies developing carbon reduction technologies or investing in crops that act as a carbon sink, such as hemp.

We need a modified category of another debt instrument, sustainability-linked bonds (SLB). These bonds already exist and operate on a targeted ratchet that triggers, on average, a 25 basis points step-up if results are not met. Critics say their objectives are too vague.

But the introduction of an ‘adaption’ (+a) element within the sustainability-linked coupon would target capital for companies developing climate adaptation technologies or carbon sequestration materials such as hemp, for example, which tackle the energy intensity and carbon issues.

The current green bond market has sizable corporate, banking and sovereign interests, which will take a lot of courage and political capital from the EU – as well as from regulators here in the UK – to reform.

But a new science-based S+aLB debt product can still be created that would integrate science-based targets into the pricing mechanism. This would provide investors with greater choice and opportunity to chase returns more directly aligned with their desired climate and carbon thematic outcomes.

The planet has a science-based timeline; and regulators have a choice. They could encourage market choice by creating the right standards for these innovative S+aLB impact-focused products – or else face a protracted debate with the entrenched green bond market participants.

Jonny Mulligan, consultant, The Martello Advisory

A service from the Financial Times