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The Role of Sustainability-Linked Financial Instruments in Heavy Industry Decarbonization

Posted on February 23, 2023

Begum Gursoy
Begum Gursoy
Associate Director, Sustainable Finance Solutions Commercial

The sustainable finance market continues to evolve, providing companies with more options than ever to meet each industry’s individual needs. There are use of proceed instruments — which include green, social, blue, sustainability, and transition bonds and loans — that companies can use to finance specific sustainability projects. And then there are sustainability-linked financial instruments — bonds or loans that can be used to raise funds for general corporate purposes, which tie their characteristics, such as bond coupon rates or loan terms, to meeting ESG performance objectives.

Sustainability-linked instruments are getting increased attention from industries that have been traditionally labeled hard-to-abate or carbon intensive. The attraction stems from the flexibility in the use of proceeds and the ability to set sustainability targets, rather than fund specific green or social initiatives. These sustainability-linked mechanisms can better convey a company’s overall ESG performance, opening the door to industries that have struggled to enter the sustainable finance market in the past.

With the effects of climate change looming, governments and organizations of all stripes need to work with carbon-intensive industries, such as steel, oil and gas, aviation, and mining, and invite them to participate in global decarbonization efforts. This can, in part, be achieved through sustainability-linked instruments, by providing financial incentives for meeting or exceeding ambitious environmental targets. Without the buy-in of heavy industry to reduce greenhouse gas (GHG) emissions, climate targets like the 2015 Paris Agreement may be impossible to achieve.

In this article, we will demonstrate how heavy emitters can use sustainability-linked financial instruments to lend more credibility to their ESG ambitions and provide examples of companies who are doing it the right way.

Selecting the Right Tool With Sustainability-Linked Instruments

Use of proceeds instruments such as green and social bonds and loans are meant to fund specific sustainable projects and activities. This is a commendable pursuit, but choosing an incompatible instrument may raise doubts about a company’s overall sustainability performance. For example, a steel company could issue a green bond to fund the construction of its new certified green building headquarters, while its operations continue to emit at the same rate as before, with no expectation to improve its environmental track record.

On the other hand, a company within a hard-to-abate industry could issue a sustainability-linked bond or loan and base the instrument’s results on key performance indicators (KPIs) that are material to the company’s core operations, partnered with ambitious sustainable performance targets (SPTs). Furthermore, the company would also have the opportunity to outline its overall sustainability strategy, indicating to the market that it has a concrete action plan to follow through on its decarbonization commitments.

When a company is deciding what type of issuance they should take to market, they should consider which sustainable finance approach would have the greatest impact on their ESG performance. For example, a supermarket chain might issue a green bond to finance energy efficiency measures in its facilities. A use of proceeds issuance like that would only speak to scope 1 and 2 emissions. However, if the supermarket chain issued a sustainability-linked instrument instead, they could demonstrate their sustainability efforts throughout their entire value chain. 

Meeting the Market’s Decarbonization Expectations: Real-World Examples

For companies in hard-to-abate industries to enter the sustainable finance market, investors and lenders want to see their sustainability-linked bond or loan cover material elements of their operations. It is crucial for carbon intensive industries to address hard-to-abate elements within their sustainability-linked structures. After all, that is the primary purpose of this type of instrument.

Below, we highlight three companies who have used sustainability-linked bonds and loans to take their ESG leadership to the next level.

SSAB Has the Future in Mind

Swedish steel company SSAB successfully issued a US$196 million (SEK 2 billion) sustainability-linked bond, with aspirations to become the first fossil-free steel company.  The bond’s characteristics were tied to the achievement of GHG emission targets, which committed to reducing SSAB’s absolute scope 1 and 2 emissions (i.e., 68% of the company’s total emissions) by 35% in 2032. 

SSAB has implemented a sustainability strategy to meet its ESG-related targets called “With the future in mind.” The strategy aims to continuously work towards improving CO2 efficiency of its steel production process. The company has developed an emissions reduction plan, leading to 2032, which lays out key actions and reduction percentages that need to be achieved each year. 

The company also plans to convert all production sites to its innovative new Hydrogen Breakthrough Ironmaking Technology (HYBRIT) system, which removes fossil fuels from the steelmaking process. The remaining steps of production that cannot be integrated into the HYBRIT system will be carried out using fossil-free fuels and fossil-free electricity.

The Future in Action at CEMEX

In 2022, construction materials manufacturer CEMEX was recognized by Environmental Finance with the Sustainability-Linked Loan of the Year. The company’s US$3.25 billion deal was reported to be the first of its kind for that industry, incorporating three climate action KPIs in its Sustainability-Linked Finance Framework. 

The loan’s characteristics were based on ambitious targets, which include reducing carbon emissions intensity below 475kg CO2 per ton of cement produced, reaching power consumption from clean sources of 55%, and achieving alternative fuel rate of 50%, all by the year 2030. 

According to Sustainalytics’ second-party opinion on CEMEX’s Sustainability-Linked Financing Framework, the cement company’s emissions intensity reduction targets are in line with a global temperature increase well below a 2 degrees Celsius scenario decarbonization pathway.  The company’s sustainability plan, called “Future in Action,” outlines its implementation and the capital investment plans designed to reduce its carbon footprint.

Volaris and the Future of Sustainable Flight

In October 2021, Volaris, a discount airline based in Mexico, issued a sustainability-linked bond, the first of its kind in the Americas. The US$80 million (MXN1.5 billion) bond exceeded expectations, being oversubscribed by 1.9 times. 

Within Volaris’ sustainability-linked bond framework, the company committed to reducing the carbon dioxide emissions generated from its aircraft by 35.42% by 2030, with 2015 as the baseline.  Sustainalytics deemed this target to be ambitious as part of the framework’s second-party opinion.

To achieve this objective, the company is replacing its plane engines with more fuel-efficient models, is initiating operational efficiencies like optimizing flight routes, and investigating sustainable aviation fuel options.

Accountability Through Sustainable Finance

There is a lot riding on companies taking their environmental responsibility seriously and meeting global targets set out in the Paris Agreement. It is important that they be held accountable for the sustainability commitments they make, with mechanisms put in place to keep them honest. Sustainability-linked instruments provide the perfect platform to ensure companies are living up to their end of the bargain. The incentives that come from linking sustainability objectives to the characteristics of a bond or loan serves to ensure that companies will continue to innovate and evolve to meet their ambitious climate targets. 




1. F. Albuquerque. 2021. “SSAB Issues SLB For Fossil-Free Steel,” Nordsip: Nordic Sustainable Investments. June 2021.

2. Morningstar Sustainalytics. 2021. “Second-Party Opinion: SSAB Sustainability-Linked Finance Framework.” May 2021.

3. Ibid.

5. Morningstar Sustainalytics. 2021. “Second-Party Opinion: CEMEX Sustainability-Linked Financing Framework.” August 2021.

6. Ibid.

7. Unknown. 2022. “Global sustainable aviation leaders announce at the CAPA Environmental Sustainability Awards 2022,” Centre for Aviation (CAPA). November 2022.

8. Morningstar Sustainalytics. 2021. “Second-Party Opinion: Controladora Vuela Compañía de Aviación Sustainability-Linked Bond Framework.” August 2021.

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