“How can sustainability-linked bonds become an asset class in their own right?” This was the question economist Alexander Lehmann asked at the conference ‘Joining the dots: climate, nature and the sovereign debt crisis’, organised by the European think tank Bruegel on Friday 31 March in Brussels.
Sustainable finance expert Alexander Lehmann presented the findings of his publication, co-authored with research analyst Catarina Martins, ‘The potential of sovereign sustainability-linked bonds in the drive for net-zero’ (March 2023) and their application to EU climate policies.
A lack of guarantee for investors. According to Mr Lehmann, while green bonds (see EUROPE 13132/17) issued by EU governments have been well received in the capital markets, they may complicate budget management and, in that sense, fail to meet the expectations of investors seeking to have an impact on national climate policies.
And for good reason, as Mr Lehmann explained, investors and asset owners have made public commitments to limit climate transition risks and assess the alignment of sovereign bonds with emission targets. Yield spreads in bond markets are already beginning to reflect the transition risks that arise from the ineffective pursuit of climate goals by issuers. “The investor has no recourse to enforce this climate outcome, if the country’s emission decides to do otherwise”, Mr Lehmann said.
SLBs, an innovative approach. In this context, Alexander Lehmann and Catarina Martins see sustainability-linked bonds (SLBs), which link “performance indicators, outcomes and the financial terms of the bonds”, as an innovative approach to tackling climate change. Moreover, SLBs have become increasingly important in private markets.
SLBs thus offer investors the opportunity to monitor and control results related to sustainability more effectively than green bonds. But, according to Mr Lehmann, “the corporate bond market therefore shows that investors reward good climate performance that is disciplined”.
For “more credible decarbonisation”. SLBs could therefore help to encourage climate policies in EU countries. They would be an effective tool for affirming Europe’s commitment, and would strengthen capital market integration and the transparency of national policies. “It is therefore a question of putting in place a set of financial incentives behind this climate target and making decarbonisation more credible”, concluded Alexander Lehmann.
To read the publication by Alexander Lehmann and Catarina Martins: https://aeur.eu/f/65s (Original version in French by Nithya Paquiry)