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The Science of Climate Change

Climate change is no longer a distant threat or just a possibility, it is now a reality for all of us. In this pathway, Kevin Trenberth, a renowned climatologist, delves into the science behind climate change. He first introduces the climate system, its main components and forces.

Tackling the Plastic Crisis

Plastic pollution is by far the biggest threat to our oceans and this remains an incredibly tough problem to solve. Plastic credits could potentially serve as one of the much needed solutions for this crisis.

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The Scale of the Net Zero Challenge

The price of meeting net zero is estimated to be between $100-150 trillion over the next 30 years. Regardless of this cost, we need to reach net zero before climate change does irreversible damage to the environment and the economy.

ESG, Sustainability and Impact Jargon Buster

ESG, sustainability, impact… they all just mean green, right? Not quite. Despite being used often interchangeably, there are distinct differences between these terms.

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The Science of Climate Change

Climate change is no longer a distant threat or just a possibility, it is now a reality for all of us. In this pathway, Kevin Trenberth, a renowned climatologist, delves into the science behind climate change. He first introduces the climate system, its main components and forces.

Tackling the Plastic Crisis

Plastic pollution is by far the biggest threat to our oceans and this remains an incredibly tough problem to solve. Plastic credits could potentially serve as one of the much needed solutions for this crisis.

More pathways

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+1,000 expert presented, on-demand video modules

Learning analytics

Keep track of learning progress with our comprehensive data

Interactive learning

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Managed learning

Build, scale and manage your organisation’s learning

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Featured Content

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The Scale of the Net Zero Challenge

The price of meeting net zero is estimated to be between $100-150 trillion over the next 30 years. Regardless of this cost, we need to reach net zero before climate change does irreversible damage to the environment and the economy.

ESG, Sustainability and Impact Jargon Buster

ESG, sustainability, impact… they all just mean green, right? Not quite. Despite being used often interchangeably, there are distinct differences between these terms.

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What is a Sustainability-Linked Bond or Loan?

What is a Sustainability-Linked Bond or Loan?

Matthew MacGeoch

In this video, Matthew explains sustainability-linked bonds and loans, financial instruments that tie interest rates to companies' progress on sustainability goals like reducing greenhouse gas emissions. He highlights how they differ from green bonds, key challenges such as weak or irrelevant targets, and the importance of setting ambitious goals aligned with a 1.5℃ climate pathway. He also shares best practices for issuers, including focusing on sector-specific KPIs, engaging third-party verifiers, and ensuring transparency to build trust and drive meaningful impact.

In this video, Matthew explains sustainability-linked bonds and loans, financial instruments that tie interest rates to companies' progress on sustainability goals like reducing greenhouse gas emissions. He highlights how they differ from green bonds, key challenges such as weak or irrelevant targets, and the importance of setting ambitious goals aligned with a 1.5℃ climate pathway. He also shares best practices for issuers, including focusing on sector-specific KPIs, engaging third-party verifiers, and ensuring transparency to build trust and drive meaningful impact.

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What is a Sustainability-Linked Bond or Loan?

7 mins 12 secs

Key learning objectives:

  • Understand what sustainability-linked loans and bonds are

  • Understand the importance of setting credible and ambitious targets

  • Outline some development issues in the sustainability-linked market

  • Outline best practices for when issuing sustainability-linked debt

Overview:

Sustainability-linked bonds and loans are financial instruments whose interest rates fluctuate based on a company's performance against predefined sustainability targets, such as greenhouse gas (GHG) emission reductions. Unlike green bonds that earmark funds for specific projects, these instruments have no restrictions on fund usage and focus on achieving overarching sustainability performance targets (SPTs). Key challenges include issuers using too many non-GHG KPIs, which hampers comparability, and not setting material GHG targets relevant to their sector. Best practices recommend setting credible and ambitious GHG targets aligned with a 1.5℃ climate pathway. 

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Summary
What are sustainability-linked bonds and loans, and how do they work?

Sustainability-linked bonds and loans are financial instruments where the interest rate is tied to the issuer's achievement of predefined sustainability performance targets (SPTs). These targets are based on key performance indicators (KPIs) such as greenhouse gas (GHG) emission reductions, renewable energy capacity, or water usage. If the issuer meets the agreed-upon targets, they may benefit from a lower interest rate; failing to meet them can result in a higher rate. Unlike green bonds, there are no restrictions on how the proceeds are used, allowing for general corporate purposes while incentivising sustainable practices.

How do sustainability-linked bonds and loans differ from other sustainable debt instruments like green bonds?

The primary difference lies in the use of proceeds and the structure of incentives. Green bonds have ringfenced proceeds dedicated to financing specific environmentally beneficial projects or assets, with strict guidelines on how the funds are used. In contrast, sustainability-linked bonds and loans do not restrict the use of funds; they are general-purpose instruments. The key feature is the linkage of the financial terms to the issuer's overall sustainability performance, measured against agreed-upon KPIs and SPTs. This creates a direct financial incentive for the issuer to improve their sustainability performance across the entire organisation.

What are the key challenges facing the development of the sustainability-linked debt market?

One major challenge is issuers using too many non-GHG KPIs, which dilutes comparability between deals and makes it harder for investors to assess the quality and ambition of the targets. Another issue is the lack of material GHG targets relevant to the issuer's sector, leading to concerns about the credibility of the sustainability commitments. These factors can result in greenwashing perceptions and reduce investor confidence. The diversity in KPI selection and insufficiently ambitious targets hinder the standardisation and growth of the market, making it crucial to address these issues for the market to mature effectively.

Why is it important to set credible and ambitious sustainability performance targets (SPTs), and how can issuers achieve this?

Setting credible and ambitious SPTs ensures that sustainability-linked debt instruments genuinely contribute to environmental goals and enhance the issuer's accountability. Credible targets cover all material sources of emissions relevant to the issuer's sector and are based on robust, verifiable data. Ambitious targets align with a sector-specific 1.5℃ climate pathway, representing significant progress toward mitigating climate change. Issuers can achieve this by conducting thorough assessments of their emissions, using standardised metrics, and adhering to guidelines from reputable organisations like the Climate Bonds Initiative. Transparency in reporting and external verification further bolsters the credibility of the targets.

What are best practices for issuing sustainability-linked debt?

Best practices include prioritising sector-specific GHG emission reductions as primary KPIs to ensure materiality and comparability. Issuers should set SPTs that are both credible—covering all significant emission sources—and ambitious—aligned with a 1.5℃ climate pathway. Engaging third-party verifiers and adhering to established frameworks like the Climate Bonds Initiative's methodology enhance transparency and trust. It's also advisable to integrate these instruments within a broader transition plan, demonstrating a holistic commitment to sustainability. Regular reporting on progress and open communication with investors help maintain accountability and support market confidence.

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Matthew MacGeoch

Matthew MacGeoch

Matthew MacGeoch is a Senior Research Analyst at Climate Bonds' Research Team, specialising in transition plans, transition finance, and hard-to-abate sectors. He has led the development of Climate Bonds' SLB dataset and methodology, and has since developed their transition plan monitor. He has experience from the UN Department for Economic and Social Affairs, the Oxford Institute for Sustainable Development, and the Oxford Silk Road Society Think tank. He has also worked at the Afghanistan and Central Asian Association and Lafiya Nigeria, focusing on social issues.

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