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Sustainability-Linked Bonds

Description

Sustainability-Linked Bonds (SLBs) are bond instruments utilized to finance or re-finance a combination of environmentally (e.g., renewable energy, clean transportation, energy efficiency) and socially (e.g., access to clean water, transport, healthcare, housing) friendly projects. If the projects have only an environmental dimension, the bond is called green bond. Similar to green bonds, sustainability-linked bonds must have clearly communicated sustainability objectives, a selection process for eligible projects, and a detailed plan for managing associated risks. The bond issuer must provide annual updates on the allocation of funds, including project descriptions, amounts allocated and expected impacts. This transparency allows investors to understand the environmental and social benefits and financial viability of the projects financed by green bonds.

 

Benefits

Sustainability-linked bonds are critical, yet under-utilized financing mechanisms for clean energy projects in emerging markets. By providing substantial capital, lowering the cost of capital, and promoting sustainable development, they can play a vital role in advancing the clean energy transition and supporting economic growth in these regions.

Although they don't inherently offer better risk or return than conventional bonds, SLBs signal a commitment to sustainability, attracting diverse funding sources. In spite of the challenges commonly associated to assessing their impact or the exact use of funds, sustainability-linked bonds support environmental and social goals and aim to offer a transparent, diversified investment option that aligns finance with policy objectives. The evolution of the bonds market promises increased standardization and investor comfort over time.

 

Case Study

Ecobank issued the first sustainability bond launched by a sub-Saharan Africa institution

In 2021, Ecobank Transnational Incorporated (ETI), headquartered in Togo, successfully issued USD 350 million in Tier 2 Sustainability Notes. This issuance marked the first time a financial institution in Sub-Saharan Africa launched such notes, featuring a 10-year non-callable 5-year structure. The bonds were listed on the London Stock Exchange and carried a coupon rate of 8.75%, with semi-annual interest payments. The proceeds from the bonds were earmarked for financing or refinancing eligible sustainable projects, as per ETI's Sustainable Finance Framework, which received a Second Party Opinion from DNV.

The offering attracted global investors’ interest, achieving a 3.6x oversubscription with an order book peaking at over USD 1.3 billion. Notably, the transaction was anchored by a USD 50 million commitment from the Dutch development bank FMO. This initiative underscored Ecobank's commitment to sustainable financing and highlighted the confidence of international investors in the bank's strategic positioning within the pan-African market.


Additional Sources

Locations
Africa, Togo
Year published
01 January 2021
Finance mechanism
Bonds

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