A quarter of Environmental, Social, and Governance (ESG)-linked bonds containing “exit clauses” can be redeemed by issuers to avoid paying penalties for not fulfilling climate targets. 

Sustainability-linked bonds (SLB) purport to “offer lower interest rates to issuers” that adopt ESG principles and advance net-zero aims. SLBs are considered total impact bonds like green, social, sustainability, and sustainability-linked (GSSS) bonds. In total, bond issuance year-to-date is valued at $278 billion of the $6.4 trillion ESG debt market. 50% of GSSS bonds are backed by government issuance.

But Bloomberg NEF found debt accumulated by SLBs “has started to attract criticism from asset managers, with a number of the world’s largest ESG bond investors refusing to buy the bonds.” 

Maia Godemer, a sustainable finance analyst at BNEF, found SLBs not only contain exit clauses, but also “toothless terms and conditions” and poorly-defined ESG targets. 

Godemer, however, contends even with its flaws SLBs have untapped potential as “a powerful engagement tool to incentivize companies to walk their sustainability talk.” 

Nevertheless, GSSS bonds are mired in controversy and invite financial instability. As I noted on IWF’s website about blue bonds recently: 

Unlike conventional bonds—loans made by investors to borrowers—blue bonds are financial instruments aimed at supporting ocean sustainability and are considered a ‘subset’ of green bonds.

Blue bonds are very similar to green bonds—which are issued on the ‘promise to use the funds raised for specific green, climate and sustainable purposes.’ But like green bonds, investing in blue bonds could lead to financial instability.

ESG investments are controversial because they inject non-pecuniary goals into investing, boast poor return-on-investment, and invite corporations to greenwash and virtue signal on social causes. The “exit clause” on these bonds exposes that even ESG’s biggest proponents don’t really take their commitments seriously. 

To learn about problems with ESG bonds, go HERE.