Although CSR maturity levels and practices vary across issuers, green bonds are commonly characterized by four essential principles:

1. Exclusive use of funds for eligible green projects,
2. A project selection and evaluation process,
3. Fund management to ensure proper allocation,
4. Annual reporting on fund usage and the evolution of qualitative and, if possible, quantitative performance indicators for projects.

To ensure transparency, issuers can draft an issuance framework that must be validated by a Second Party Opinion (SPO). These are typically provided by extra-financial rating agencies (Moody's ESG, Sustainalytics, ISS, etc.), which assess the alignment of the framework with existing standards and the quality of the information presented. The main market standards are the Green Bond Principles (GBP) and the Climate Bond Initiative (CBI), with CBI appearing more structured with impact measurement methodologies defined by project type, and the requirement for impact reports to be verified by an OTI certified by CBI.

Sustainability-Linked Bonds (SLBs) are debt securities where the interest rate fluctuates (either up or down) based on the achievement of specific social or environmental performance targets (Sustainable Performance Targets, or SPTs), such as decarbonization, waste management, sustainable water use, health and safety, gender equality, employee training, etc. The targets set must be ambitious and specific, and they must be measured in the medium and long term through Key Performance Indicators (KPIs). Unlike Green Bonds, funds raised via SLBs can be used for the company’s general needs (working capital, investments, etc.). SLBs thus aim to support companies’ ecological and climate transition, particularly by forcing the issuer to reflect on the positive or negative impacts of their business model and integrate these into quantified objectives in a CSR strategy.

Beyond the difference in fund usage, both types of financing must align with the aim of improving the company's CSR and sustainability strategy. This is particularly true for SLBs, which should fit into an already well-established CSR and sustainability approach, specifically focusing on an economic model transition, to avoid the risk of greenwashing. This type of financing also has the advantage of involving all company stakeholders (employees, suppliers, clients, banks, etc.), as the KPIs and SPTs must be calibrated in consultation with them. Additionally, SLBs help strengthen the credibility of CSR strategies by linking them to the cost of financing.

However, structuring SLBs requires significantly more effort, as they prompt deep reflection on the company’s business model, something not necessarily required with Green Bonds.

Another challenge is defining the ambition of KPIs and SPTs, which must be demonstrated as "beyond business as usual," meaning they must surpass the past and future performance of the issuer and their sector peers. These elements should demonstrate that the company is making extra efforts and transitioning to a more sustainable business model. Furthermore, it is recommended to have the calibration of KPIs and SPTs, as well as their level of ambition, verified by an external certifier (such as SBTi for GHG emissions) to further minimize the risk of greenwashing. For all these reasons, SLBs are mostly issued by large listed companies that are used to publishing extra-financial information and have the necessary CSR expertise in-house to conduct such reflections.

Green Bonds appear less complex to structure, particularly in the context of large investment plans for renewable energy projects and energy-efficient buildings (new constructions or renovations), as well as assets related to water and waste management. However, criticisms of this financing type often focus on the difficulty of defining and setting eligibility criteria for "green" projects, as well as the potential for issuers from controversial sectors to use green bonds (such as the financing of the Hong Kong airport expansion in 2022). Moreover, these products develop in an unregulated framework and currently rely solely on market standards (e.g., ICMA’s Green Bond Principles).

A Relative Reduction in Financing Costs

The main advantage of these financing methods is often cited as the lower interest rate compared to traditional financial products. This difference, called the "greenium,"² remains usually modest: it is generally around a 10 to 30 basis point reduction, although it depends on various factors and is not uniform across markets. Indeed, this reduction is offset by additional costs associated with structuring KPIs, the framework, review by a Second Party Opinion if applicable, and verification of KPIs' progress by an OTI.

Therefore, the lower financing cost should not be the primary motivation. Future issuers should primarily want to:

• Strengthen the maturity and credibility of their CSR/ESG strategy by linking it with company financing,
• Enhance dialogue with stakeholders by involving them in the development of KPIs,
• Diversify and attract new investors, and strengthen relationships with their bank.

An Evolving Extra-Financial Reporting Framework Contributing to Structuring the Market for Sustainable Bonds

In the future, the evolution of extra-financial regulation should foster the development of Green Bonds and SLBs. Specifically, the implementation of the Corporate Sustainability Reporting Directive (CSRD) starting in 2023 will increase the number of companies required to publish extra-financial data from 11,000 to 50,000, while also enhancing current requirements, with more detailed and complete ESG information based on a double materiality approach. Companies newly subject to the regulation, particularly mid-sized firms, will thus be able to leverage this enhanced and standardized information, alongside the analysis of their business model and transition plans, to construct KPIs and SPTs for SLBs. The introduction of the CSRD could therefore partly address current constraints in structuring Green Bonds and SLBs, particularly concerning the access to and production of reliable, comparable ESG data.

The European Green Taxonomy should also help limit the risk of greenwashing by defining sustainable activities based on criteria for substantial contributions to at least one of the six environmental objectives (positive impact criteria to assess environmental benefits), no harm to other objectives, and minimum social safeguards demonstrating consideration of potential negative externalities. It is on this basis that the European Union intends to advance after the preliminary agreement between the Council and Parliament.³ to implement a regulation for green bonds, the EU Green Bond Standard (EU GBS). This standard, currently under revision by the European Commission, includes the obligation for projects to align with the Green Taxonomy, with a 15% margin of flexibility. The Green Taxonomy will thus support the development of the Green Bond market, both for issuers and investors, by demonstrating that the funds are directed toward aligned projects.

Finally, the 2022 clarifications to the "Disclosure" regulation (Sustainable Finance Disclosure Regulation, or SFDR) by supervisors also encourage investors to align their investments with the Green Taxonomy. Green bonds, whose financed projects align with the Green Taxonomy as stipulated by the EU GBS, will thus be more attractive to investors wishing to implement Article 9 funds.