The new breed of bond stirring things up in sustainable debt

With global volume having surged in 2021, bond category is booming

The new breed of bond stirring things up in sustainable debt

This article was provided by François Desjardins, Editor at Addenda Capital.

Quick! Name the fastest-growing bond category in the sustainable investment universe. If you said “green bonds”, try again. If you said “sustainability-linked bonds”, or SLBs, you’re right.

As businesses look for ways to reduce their carbon emissions, an increasing number of companies find themselves needing to raise capital. Against this backdrop, SLBs have been hailed as a flexible tool since they don’t tie the proceeds directly to a specific project, as opposed to other securities such as green, social and sustainable bonds. In other words, the capital raised with SLBs is simply tagged for general purposes.

Just how popular are sustainability-linked bonds? According to data compiled by Bloomberg (source 1), their global volume is nothing short of booming. From about $11 billion US in 2020, issuances jumped to $103 billion US in 2021.

“It’s a more meaningful way for energy companies to transition as green bonds may not apply to their overall strategy. It can help a company progress and opens the market up to other industries,” says Diane Young, Senior Portfolio Manager, Fixed Income and Co-Head, Corporate Bonds, at Addenda Capital. “Also, because of the issuance linking the bonds to company-wide targets, it allows for issuers and investors to achieve objectives while climate-related goals are aligned.”

More specifically, SLBs are “any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability/ESG objectives,” writes the International Capital Market Association, which published its Sustainability-Linked Bond Principles in June 2020 (source 2). These objectives, it adds, should be measurable key performance indicators (KPI) and evaluated against predetermined targets.

One common characteristic of SLBs is a coupon payment that varies depending on whether those targets are achieved. For example, if a company failed to meet a target on emissions reduction, the planned payment to security holders would increase by a predetermined amount.

Investors seeking fixed income opportunities featuring a sustainable theme now have a choice of many bond types, which may be divided into two overarching categories.

Bonds tied to use of proceeds:

  • Green bonds
  • Social Bonds
  • Sustainability Bonds

Bonds tied to key performance indicators:

  • Sustainability-linked bonds (SLB)
  • Social impact bonds
  • Environmental impact bonds

Two cases in Canada

Canada saw two cases of SLBs in 2021 but more are likely on the way. Telus Corporation was the first Canadian company to issue a sustainability-linked bond during the summer, raising $750 million CAD shortly after publishing details of its SLB “framework” and emissions reduction targets. The bond came with a starting interest rate of 2.85% and a 10-year maturity. “As part of the Framework, Telus has committed to reducing its absolute Scope 1 and 2 greenhouse gas emissions by 46% from 2019 levels by 2030,” the company wrote in a press release on June 28. (source 3) From a return perspective, here was a twist: should Telus fail to achieve the target by December 31, 2030, “the interest payable on the notes will increase by 1.00% per annum.”

Enbridge was the other Canadian company to flex a new SLB framework during the year. Soon after publication of its modus operandi, the Calgary-based oil and gas pipeline operator sold US$1 billion of a 12-year bond bearing a 2.5% coupon. Strong demand from investors led to a yield of 2.54%, five basis points lower than if the company had issued regular bonds, Enbridge vice-president of Treasury Max Chan told Bloomberg (source 4) at the time. In September, Enbridge did it again by raising $1.1 billion CAD with a 12-year bond. This time around, the yield was 10 basis points lower than if the company had issued a regular bond, Mr. Chan said (source 5). For example, the second issuance mentioned a possible increase in the interest rate payable unless Enbridge achieves targets related to workforce diversity by a specific date.


There are a few points to be mindful of, namely around disclosure and comparability, the Canadian Bond Investors’ Association warned in a public statement (source 6). “The CBIA is encouraged by the attention being given to environmental, sustainability and social goals with the growth in development of labeled bonds including various green, sustainable, transition, social and SLBs. There is, however, concern around the variability of frameworks and potential issuance of bonds with less than challenging use-of-proceeds eligibility and disclosures, SLB key performance indicators (KPIs), target observation dates and/or penalty levels.”

The CBIA added that “it is critically important for many investment mandates that the stated purpose of such bonds be authentic and designed to be ambitious and impactful, not simply ‘business as usual’”.

What next? In global terms for now, green bonds still represent the largest piece of the sustainable debt pie, with total issuance of more than $540 billion US in 2021 according to Bloomberg. Social bonds and sustainable bonds, two categories that also tie the use of proceeds to specific projects, were seen ending 2021 at $200 billion and $175 billion respectively. If last year is any guide, SLB issuances could quickly move up that ranking.