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People and MarketsCommentLeader

Where there’s a will there’s an SLB

Banks shouldn’t let conceptual considerations stand in the way of them issuing sustainability-linked bonds.

Investment bankers have spent the last few months considering whether financial institutions are suited to issuing SLBs.

The structures allow firms to put their money where their mouths are. Borrowers promise to meet defined sustainability targets within a certain timeframe and pay a penalty if they cannot.

Various different companies have already sold SLBs, committing themselves to ambitious pledges to green their businesses.

The concept is seen as trickier for banks though, partly because they are more sprawling and their impact is more difficult to measure. How does a bank prove its key performance indicator really is of crucial importance? What sort of data should market participants rely on when tracking the progress of different institutions?

These are big questions, of course. But there is no reason that these practical barriers should be read as proof of a flawed concept.

Regulatory constraints are another matter — and ultimately out of banks’ hands. But the conceptual difficulties should really just encourage banks to think more deeply about how they can gauge their role in the transition towards a cleaner economy.

FIG borrowers have often tried to treat bonds with a dedicated use of proceeds as though they were an advert for their broader ESG commitments, rather than just their eligible asset pools.

But SLBs could actually give banks a way of clarifying whether investors think their ESG goals are ambitious and credible enough.

There is clearly plenty of room for improvement. Many large banks have actually expanded their lending to the fossil fuel sector since the Paris Agreement, for example, according to a recent report from a coalition of NGOs.

In the conversation about bank SLBs, it will likely be a case of finding the will first; then they will certainly find a way.