Sustainability-Linked Instruments – Helping In The Transition To Sustainable Economy?

Many of us have heard companies and banks talking about sustainability-linked instruments. But what actually are these instruments and what is their contribution to sustainable development? Are there any risks involved and what are the main benefits of such instruments?

Sustainability-linked instruments tied in with performance

A sustainability-linked instrument, i.e. a loan or a bond, is an instrument where the pricing of the instrument is tied to the sustainability performance of the borrower. The borrower agrees together with the lenders or bond arrangers on certain key performance indicators (KPIs) that are monitored throughout the life of the loan or bond.

If the borrower fails to reach the targets set for the KPIs, the pricing of the instrument goes up, meaning that it will become more expensive for it. Furthermore, the loan's margin decreases if the targets will be reached. Most of the KPIs are currently related to the environmental aspects, most often to