Green bonds vs SLBs: The CFO’s perspective

“People need to understand that ESG is money” I was told by an angry CFO during one of the 50 interviews I conducted during my CFO research on their role for net zero transition. Fortunately, the interview was on Zoom as the strong reaction could have been too lively in person. The role of the CFO in net-zero research was a year-long project conducted in collaboration between the UN Global Compact’s CFO Coalition and Climate Bonds Initiative.

The angry CFO in question, complained that in the last two days his team had to remedy an ESG rating downgrade, based on incomplete information, which in turn triggered bonds and equities prices to move. Labelled bonds can be very powerful instruments that way, helping companies finance green projects and signal their green intentions if they are carefully selected and implemented.

Following we explore green bonds versus sustainability linked bonds (SLBs) firstly from a CFO perspective, and later in a follow-up installment we tackle the investor perspective. I hope you enjoy these next blogs.

Green bonds vs SLBs

Imagine you are the CFO or the treasurer of a company looking into tapping the sustainable bond market to finance your investments. Your advisor is suggesting the issuance of either a green or a sustainability-linked bond, which one do you go for?

Between 2019 and 2020 and up until then, the only relevant labelled bond instrument available, besides social bonds, was the green bond while in the last few years, companies had the opportunity to issue sustainability-linked bonds (SLBs) in parallel or instead. Green bonds are more resource-intensive to issue. Initially they require CapEx volumes belonging to ICMA Green bond principles categories and ideally those projects should be aligned to 1.5C taxonomies.

Examples of 1.5C taxonomy criteria1Examples of ICMA Green Bond categories
Water infrastructure: The average carbon intensity of energy used to power the plant must be at or below 100g CO2/kWh over the remaining lifetime of the asset
Solar & Wind: Facilities shall have no more than 15% of electricity generated from non-renewable sources
Hydropower: Proposed: power density > 5W/m2; or emissions of electricity generated < 100g CO2e/kWh
● Renewable energy
● Energy efficiency
● Pollution prevention and control
● Terrestrial and aquatic biodiversity
● Clean transportation
● Green buildings

Green bond issuance requires the issuers of such bonds to put in place rigorous processes to select, tag and report on the earmarked investments. All this takes a significant amount of time and effort to implement. If a CFO is looking at the pure short-term cost-benefit analysis, the associated greenium from both green bonds and SLBs rarely compensates, and one should look broader to ascertain those. While the basic and simplistic reason for issuing those it is investor demand for green, a more detailed answer is reported below.

One of the attractions of a sustainability-linked bond is that it is closer to a plain-vanilla bond as its proceeds are not attached to specific projects or assets and therefore are typically quicker to issue, monitor and report, with the caveat of a target to be achieved. Despite being closer to plain-vanilla bonds, as explained on page 12 of the CFO publication, setting ambitious targets can take a considerable amount of work and effort in addition to bringing internal stakeholders on board.

The green credential perspective of those instruments

The green credibility of any of these instruments will ultimately be the basis for investor demand. Green bonds are the “aperitivo” in that they are not the comprehensive solution to fully greening a company’s activities. They are though an excellent way for companies to start tapping into the benefits of those sustainable finance instruments, being well-established with US$351.9bn issued alone for H1 20232and a total historical issuance of c. US$3.5tn3. Some of the advantages of green bonds much alike SLBs include:

  • Broadens investor base and introduce new engagement opportunities
  • Facilitates deeper dialogue with investors
  • Enhances reputation and visibility
  • Strengthens internal integration

Green bonds on their own are not sufficient to support a company’s entire transformation. Companies with serious commitments need a broader set-up for decarbonisation strategy often discussed as “the transition plan”. In that regard, SLBs are potentially instruments of choice as they are generally underpinned by a company-wide decarbonisation target.

Green bondsWell established instrument type with strong demand from dedicated investors
Well established format and frameworks, including alignment to ESG regulation
Excellent reputational benefits
Enhanced dialogue with investor base
Potential for pricing benefit (greenium)
Requires critical mass of qualifying green projects
May require long lead time to prepare framework  and structure
Restricted Use of Proceeds
Additional costs and disclosures
SLBsStrong investor appetite for  climate investments and holistic approaches linking the issuing entity to financing conditions and forward looking benchmarks
As a general-purpose finance instrument, relatively easy to issue once a framework has been defined
Enhances dialogue with  investor base
Potential for increased sector diversification (investors)
Credibility of the climate benefits of the instrument currently being challenged while the market remains at an early stage
Requires significant internal work to align all parts of the business
Fear of missing a target might prevent a company from issuing an SLB

Key questions to a CFO

  • What are, in the specific situation of my company, the benefits and the costs of issuing a green bond or a SLB?
  • What are investors’ preferences? (we will tackle this in the next blog)
  • Do I have an investment project sufficiently important which can trigger a green bond issuance?
  • Is my company sufficiently advanced in ESG awareness and KPIs for triggering an SLB issuance?
  • Are the SLB KPIs sufficiently stretching, to avoid being negatively perceived by the market with no PR benefit?
  • What would be the step-up clause in case of non achievement of the SLB KPIs?
  • Do I have interest in introducing the concept of a step-up clause in one of my bonds?
  • Is there a strong risk in which investors will require a step-up clause for all bonds in the capital structure? Am I setting up a precedent?

My recommendations to a CFO

One can be cynical, and see these as just a capital market instruments, however, best-in-class CFOs will go beyond the capital instrument and the need to optimise funding, using it as a tool to futureproof their business and signal green intentions. Some more specific recommendations include:

  • Use sustainable finance instruments to support a sustainable strategy. The use of the labelled instrument should be aligned to the strategic objectives of the company. The strategy itself needs to generate a clear and identifiable value and business case for all stakeholders.
  • Use the issuance of these instruments to engage with investors. The CFO research highlighted how much investors appreciate knowledgeable CFOs who can convey credible transition plans or decarbonisation efforts whilst linking it to financial performance.
  • Consider the certification of the whole entity. While science-based targets, pathways or taxonomies should always be preferred, a CFO should consider certifying the whole entity. While more stringent for its criteria, all capital market instruments (bonds, loans, equity, etc.) would then be certifiable without the need to construct step-ups or asset segregation, as outlined on certain green certifications.
  • Get internal buy-in. In-line with the first point, align the financial instruments objectives to the overall strategy of the business by involving the overall business.
  • Tackle scope 3 emissions. Try as much as possible to work on scope 3 emissions even if it is difficult. Investors are requiring them to be tackled. For upstream scope 3 emissions, engage with your supply-chain manager.
  • Nature risks are around the corner. Consider investing in understanding nature risks, with TNFD being launched, there are frameworks to start quantifying those risks. Investors are getting up to speed and are starting to probe.

Currently only about 25% of SLBs4 have credible climate targets in place detracting from investor confidence, which we will explore in our next blog, the investor perspective on green bonds vs SLBs, also a key consideration for CFOs. I look forward to hearing your views.

Get in touch:

With thanks to Michel Pinto, former CFO Unilever France and former group Treasurer, for his contribution.


1 – Climate Bonds Initiative

2 – Bloomberg League Tables: Green, Social, Sustainability Issuance H1 2023

3 – Climate Bonds Initiative as of end of October 2023

4 – Climate Bonds Initiative

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