The choice between a green bond and a sustainability-linked loan turns on a single structural question: does your company need to fund specific, eligible green projects, or does it want to tie financing costs to company-wide sustainability performance? Green bonds and green loans are "use of proceeds" instruments—the money must be allocated exclusively to designated environmentally sound projects. Sustainability-linked loans and bonds impose no such restriction on the funds, but instead adjust the financial terms based on whether the borrower meets predetermined sustainability performance targets. This article sets out the mechanics of both pathways and a decision framework for corporate leaders weighing them.
Green Bonds vs. Sustainability-Linked Loans: A Strategic Overview
Both instruments sit within the broader sustainable finance market, but they answer different corporate needs. Green bonds are corporate debt instruments whose proceeds fund new or existing projects intended to have positive environmental or climate effects; the defining attribute of a green bond, as legal analysis from Covington puts it, is the use of its proceeds. Sustainability-linked loans, by contrast, highlight a company's commitment to its ESG goals by linking improved sustainability performance to lower-cost financing, with loan proceeds available for general corporate purposes.
The distinction matters at the level of market structure as well. Green bonds emerged as a way for a variety of issuers to finance environmentally friendly projects, with the first green bond issued in 2008 and issuances totaling $257.5 billion in 2019, according to Covington's sustainability toolkit. Sustainability-linked loans represented a $36.4 billion market in 2018, rising to $122 billion in 2019, with momentum concentrated in Europe and the Asia-Pacific regions. Both markets have since grown, but the structural difference between the instruments has remained constant.
