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Financing a Sustainable Future: The Evolution of Sustainability-Linked Finance Instruments

Posted on September 15, 2022

Curtis File
Curtis File
Editorial Manager, ESG and Sustainable Finance

Despite the market volatility due to COVID-19, the sustainable finance market has seen rapid growth in the last two years. Sustainable debt issuance set a record in 2021, surpassing US$1.6 trillion.1  Even in the face of broader market forces, which contributed to a decline in the volume of issuances in the first part of 2022, the total outstanding value of the sustainable finance market continues to rise.2  

Chart showing the growth in sustainable debt issuance from 2013-2021

The growth in sustainable finance is, in part, a reflection of the pressure from regulators, consumers and investors on businesses to prioritize ESG issues and sustainability in their strategic decision-making. As a result, organizations of all types are leveraging sustainability-linked finance instruments, such as sustainability-linked loans (SLLs) and sustainability-linked bonds (SLBs), to help communicate their sustainability targets and compensate investors if targets are not met. 

TDC Net, for example, has sought to raise EUR 500 million (US$504 million) through sustainability-linked bonds as part of the company’s Sustainability-Linked Finance Framework. The company plans to use the funds to achieve its net-zero target by 2030 and to push digitalization as an enabler of its green transition.3 

With the market rapidly expanding, there are also growing expectations for transparency around key performance indicators (KPIs) and associated sustainability performance targets (SPTs) of sustainability-linked finance instruments.

The Growing Importance of KPIs and SPTs

Sustainability-linked finance instruments help organizations improve their sustainability profiles by tying the instrument’s financial characteristics (i.e., the loan terms or bond coupon rate) to the company’s achievement of sustainability performance targets related to material ESG issues. On an annual basis, issuers are required to report on and provide third-party verification of progress made toward these targets.

Although sustainability-linked finance instruments can be used for general corporate purposes, issuers are still accountable for achieving their sustainability targets. As a result, choosing the right KPIs and SPTs has become increasingly important.

The KPIs selected by issuers should be based on ESG themes that are material and relevant to the issuer’s business and industry. These will vary across industries and can include metrics such as greenhouse gas emissions, water usage, or metrics related to employee engagement. To ensure the credibility of their KPIs, the Sustainability-Linked Loan Principles (SLLPs) and Sustainability-Linked Bond Principles (SLBPs) provide corporate borrowers and lenders with a set of guidelines when developing their financing framework. 

A robust selection process of SPTs signals that the issuer is credible and committed to improving their sustainability performance. Under the guidance of the SLLP and SLBP, SPTs should be comparable across time and industry peers. Once the framework has been chosen, issuers should seek a second-party opinion (SPO), to provide assurance to lenders and investors that the bond framework is aligned with accepted market principles. 

Lenders increasingly prefer a wider selection of both external and internal KPIs. ING direct, for example, often requires SLLs to be linked to three to five SPTs.KPIs can be unique to the issuer or its industry, such as Thai Union’s KPI of increasing monitoring aboard tuna vessels for its US$183 million-equivalent SLL. A combination of internal and external KPIs can provide a more holistic and credible picture of a company’s sustainability performance. 

According to a recent report published by Environmental Finance, carbon and greenhouse gas emission reduction KPIs account for about 75% of KPIs used in sustainability-linked bonds and loans.5  Other environmental issues, such as water, make up an additional 10%, social issues another 10%, and less than 5% are related to governance issues. The use of KPIs tied to scope 3 emissions, or indirect emissions that occur in the value chain, has also become increasingly popular. This is a promising development given the high impact of scope 3 emissions for many industries. 

Other trends include a continued emphasis on transparency, accuracy, and integrity of the information that will be disclosed and reported by issuers to stakeholders. Increasingly, stakeholders are looking for information about the use of proceeds, the process for project evaluation and selection, the management of proceeds, and reporting. 

What’s Next in the Evolution of Sustainability-Linked Instruments

While other bonds have shown a double-digit decline, the sustainability-linked finance market has continued to grow. Although some of this growth can be attributed to a low base effect,the market has nearly doubled in size. 

This trend is predicted to continue, with growth in the value of the sustainability-linked finance market driven by three main factors: 

  1. SLBs and SLLs are flexible and can be used for general corporate purposes.
  2. Sustainability-linked finance instruments offer companies a good avenue to communicate their sustainability commitments to the market.
  3. Investors are continuing to demand more information on material ESG issues.
Despite advancements in the design and implementation of sustainability-linked financial instruments, there is still progress to be made. Although a variety of voluntary guidelines have emerged over the last decade, there is still a need for consensus on how to measure the success of sustainability-focused projects. 

Transparency is also becoming a critical issue as the market continues to grow. Given the current volatile credit environment, companies need a robust, transparent reporting process to demonstrate progress on key ESG issues to investors. 

Read our latest ebook to learn more about how sustainability-linked finance instruments can support corporate ESG improvements, the importance of setting ambitious and material performance targets, market expectations and guiding principles of SLLs and SLBs, and what to expect from the future of the sustainability-linked finance market.



1 BloombergNEF. 2022. “1H 2022 Sustainable Finance Market Outlook.” January 24, 2022.

2 Natixis. 2022. “Green Bonds Review 2Q22: The green and sustainable bond market starts to mature.” April 28, 2022.

3 TDC Net. 2022. Sustainability-Linked Finance Framework.

4 Nauman, B. 2020. “Green loans catch on in push for companies to clean up.” January 20, 2020. Financial Times.

5 Environmental Finance. 2022. “Sustainability-linked Debt – Carbon Emissions KPIs.” July 11, 2022.

6 Low base effect is the tendency for a small absolute change from a low initial amount to be translated into a large percentage.



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