Sustainability-linked bonds one year on: what have we learned?

05 November 2020

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

View bio

Other insights

View more insights

3 minute read

While green debt is about to reach puberty, sustainability-linked bonds are still very much in diapers. We take a look at what we’ve learned about them one year on.

While green debt is about to reach puberty, sustainability-linked bonds are still very much in diapers. A wide variety of market participants have projected their hopes onto this nascent asset class. It’s seen as a critical tool to “mainstreaming” sustainable finance and moving the focus from projects to companies as a whole.

How is it faring so far? In the past year we’ve seen approximately €7.5bn equivalent issued in public bond format across nine tranches, with the majority to fund companies’ environmental transition. 90% of issuance has been linked to a carbon-related target, broadly equally split between emission reduction and increased uptake in renewable energy. This highlights the broad investor understanding and support for these types of metrics, a dynamic that will likely continue after the European Central Bank (ECB) announced in September that bonds with coupon structures linked to certain sustainability performance targets will become eligible as collateral for its various market operations if they contain an environmental target1.

1. Sustainability-linked bond issuance: by key performance indicator metric

Source: NatWest Markets


Sustainability-linked bonds are mostly about medium-term change: none of the bonds issued so far have had a target fall within the first 25% of its lifetime (no risk of quarter-life crisis!). The average measurement event occurs in year 5 or at 60% of the bond tenor. This is a careful balancing act between setting meaningful targets while also offering a strong enough economic incentive to meet the target, for example through multiple years of residual (stepped-up) coupon payments.

2. Sustainability-linked bond issuance: target year divided by tenor of bond

Source: NatWest Markets


What have been the repercussions of missing the target? With the exception of one transaction, all bonds have had the same margin adjustment: “25bps is the answer, what is the question?” While this has drawn parallels with US market conventions for rating step-downs, this approach may see further differentiation in the future. As chart 3 highlights, the step-up only really constitutes a meaningful portion of the at-issue credit spread (>50%) for a third of transactions.

3. Sustainability-linked bonds: margin adjustment as a % of at-issue credit spread*

Source: NatWest Markets


Encouragingly, the average European sustainability-linked bond deal size is around 40% larger than a conventional green corporate debt issue (see table 4). The lack of a specific ‘use of proceeds’ restriction helps in this regard: treasury teams from a wide variety of sectors can now credibly ‘greenify’ all of their capital structure.

4. Sustainability-linked bond average deal size

Source: NatWest Markets


This is only the beginning. With the ICMA2 Sustainability-Linked Bond Principles now fully embedded, sustainability-linked debt is likely to undergo a growth spurt in 2021, and as with any baby it’ll start teething, ensuring that its targets carry real bite. This all means that the conventional green bond product will start to face a credible challenger in the coming years – a sibling rivalry that will catalyse the markets.


Thank you to Saakshi Arora for helpful research assistance



2 ICMA  International Capital Market Association
Green bonds

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (, a SIPC member ( and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2020 © NatWest Markets Plc. All rights reserved.