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Are sustainability-linked bonds groundbreaking or greenwashing?

The bond market’s hottest structure has come under fire from a leading ESG investor, with borrowers accused of gaming the system to take advantage of demand for sustainable products.

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Sales of sustainability-linked bonds (SLBs) have already topped $25 billion this year as borrowers in Asia have followed the lead of pioneers in Europe and Latin America. Growth from here on in is expected to be exponential. JPMorgan says total issuance for 2021 could hit $150 billion.

It is easy to see why the format is proving so popular. Unlike traditional green, social and sustainable bonds, which require borrowers to use the proceeds of the deal for specific projects, the new format merely commits them to meeting one or more sustainability goals over a set timeframe.

This means that, for the first time, companies that would struggle to find sufficient sustainable projects to achieve the deal size required by big asset managers – usually $500 million – have a chance to tap into surging demand for bonds with an environmental, social and governance (ESG) component.

Yet as the market gains momentum, one leading investor has sounded the alarm over SLBs. In a recent blog post, Stephen Liberatore of US asset manager Nuveen said the structure was “lacking from the perspective of an impact investor”.