Evolution of SLBs in Sustainable Finance
Over the past decade, the thematic bond market in Latin America and the Caribbean (LAC) has expanded significantly, exceeding USD 220 billion in cumulative issuance (Figure 1).[1] This growth underscores the increasing role of fixed income debt in channeling capital toward sustainability priorities. Sustainability-Linked Bonds (SLBs) emerged in 2020 as a dynamic mechanism to align financial markets with long-term sustainability objectives, making them one of the key sustainable debt instruments.
The SLB market in LAC peaked in 2021 at USD 16 billion before declining to USD 2 billion in 2024.[2] Despite this downturn, SLBs remain a pivotal financing tool, enabling issuers to reinforce their sustainability commitments while attracting impact-focused investors.[3] As regulatory frameworks evolve and investor expectations heighten, SLBs are positioned to play a critical role in enhancing accountability and promoting sustainable capital markets.
Figure 1. SLB Issuance in LAC (USD M)
As sustainability-linked instruments keep developing, issuers must align their financial strategies with investor expectations, regulatory developments, and measurable impact. Unlike green, social, and sustainability (GSS) bonds, which earmark the use of proceeds for specific investments, SLBs are tied to Sustainability Performance Targets (SPTs). This adaptability has positioned SLBs as a preferred instrument for corporations that do not have enough green or social capital expenditures but have a sustainability strategy and can make ambitious sustainability commitments. The SLB is also an attractive financing instrument for high emitting borrowers undergoing complex decarbonization processes.[4]
The core value proposition of SLBs lies in their performance-driven financial structure, which adjusts bond terms based on sustainability outcomes. The most widely used mechanism is the coupon step-up, where interest rates increase if SPTs are not met, creating a tangible financial incentive for issuers to stay on track. On the other hand, some SLBs such as Uruguay’s Sovereign SLB, offer coupon step-downs for surpassing sustainability goals. Additional structures—such as redemption premiums, donation commitments, early redemption restrictions, and carbon credit purchases—further reinforce the credibility of SLBs as an impact-driven financing tool.[5] Figure 2 illustrates the most common mechanism in SLBs, where the coupon “steps up” if the SPTs are not met. Investors tend to reward the potential future step up with a tightening of the yield of the bond at issuance.
Figure 2. SLB Coupon step up mechanism
Despite their flexibility, SLBs must demonstrate clear, measurable progress to maintain investor confidence and avoid greenwashing concerns. Market data reveals that 58% of SLB issuances are tied to climate-related objectives, particularly GHG emission reductions, energy efficiency, and renewable energy investments.[6] This underscores the strategic role of SLBs in financing the energy transition—not as an alternative to traditional green bonds, but as a complementary instrument that enables issuers to integrate sustainability commitments within broader financial planning.
Value Proposition for Issuers and Structuring Considerations for a Robust SLB Issuance
SLBs offer issuers a strategic way to align their funding strategies with sustainability objectives while maintaining flexibility in the use of proceeds. They present a compelling opportunity to attract mission-aligned investors, and enhance corporate reputation.[7] However, ensuring their credibility and effectiveness requires addressing key structural elements that promote transparency, accountability, and investor confidence. The following recommendations can help issuers strengthen their SLB frameworks and maximize their impact:
→ Define standardized and science-based KPIs and SPTs
According to the World Bank and the Climate Bonds Initiative (CBI), one of the main concerns surrounding SLBs is the lack of standardized, ambitious, and science-based SPTs.[8][9] Many issuers set targets that reflect business-as-usual trajectories rather than meaningful improvements in sustainability performance, reducing the effectiveness of these instruments. To strengthen credibility, SLBs should incorporate sector-specific KPIs aligned with international frameworks like the Paris Agreement, ensuring that sustainability commitments are meaningful and transparent.[10]
→ Avoiding structural loopholes
SLBs should be designed to maintain financial accountability and prevent issuers from evading penalties. However, the World Bank has identified two major loopholes: delayed target dates and early call options, both of which allow issuers to weaken the financial link between sustainability performance and investor returns.[11] To mitigate these risks, SLBs should incorporate earlier target observation dates to ensure progress is measured well before bond maturity.[12] Additionally, call options should be structured to prevent early exits that avoid penalties, safeguarding investor confidence and market integrity.
→ Strengthen post-issuance transparency and verification
A major challenge for SLBs is inadequate post-issuance reporting, which undermines investor confidence and accountability, as noted by the Journal of Risk and Financial Management. Many issuers lack clear, externally verified data to track KPI progress, making it difficult to assess whether sustainability targets are genuinely being met. To build trust, issuers should ensure mandatory third-party verification and clearly disclose the methodology used to assess KPI progress.[13] This transparency will help investors distinguish between SLBs with real impact and those structured for financial arbitrage.
→ Regulatory alignment and market standards
Regulatory alignment is crucial to ensure that SLBs maintain credibility as a sustainable finance instrument. According to CBI, the International Capital Market Association (ICMA) Sustainability-Linked Bond Principles provide a strong foundation for structuring SLBs, yet many issuers fail to fully comply with these guidelines.[14] To enhance standardization, governments should support SLBs linked to national climate policies, ensuring stronger alignment with long-term sustainability goals. Clearer reporting frameworks and regulatory oversight will help mitigate investor skepticism and reinforce SLBs’ credibility.[15]
Market Dynamics: Investor Expectations and Emerging Trends
Investor scrutiny of SLBs has intensified, particularly regarding the reliability of KPIs and the ambition of SPTs. ICMA has issued enhanced guidance to improve transparency and disclosure practices, addressing concerns about SLBs with limited material impact.[16] While SLBs offer flexibility compared to traditional green bonds, investors are demanding greater accountability and measurable impact to ensure these instruments truly drive sustainability outcomes. In response, issuers are prioritizing robust KPI selection, credible third-party verification, and improved reporting frameworks to sustain investor confidence and secure favorable financing terms.[17]
Additionally, the evolving regulatory landscape requires issuers to stay ahead of new guidelines designed to mitigate greenwashing risks and impose stricter financial penalties for underperformance. Both sovereign and corporate issuers are adjusting their SLB structures to align with market expectations, integrating science-based targets and reinforcing step-up mechanisms to enhance their credibility.[18]
Although the SLB market has faced a significant downturn in recent years, experts suggest this trend represents a “flight to quality,” where investors are prioritizing issuers with stronger sustainability commitments and clearer accountability mechanisms.[19] Countries like Chile and Thailand remain active in the SLB space, with Chile committing to structuring 50% of its bond issuances in this format.[20] To further improve standardization and transparency, market participants are increasingly looking at frameworks such as ASCOR (Assessing Sovereign Climate-related Opportunities and Risks), which evaluates sovereign issuers based on climate-related indicators like net-zero targets, carbon pricing, and climate finance transparency.[21]
Looking ahead, issuers that proactively address investor concerns, integrate sustainability into their financial strategies, and demonstrate measurable progress on environmental and social commitments will be better positioned to secure financing on competitive terms. As demand for well-structured sustainability-linked instruments continues to grow, strengthening KPI selection, external validation, and transparency will be key to ensuring long-term success in the SLB market.
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Fernanda Benítez, recently graduated with a Bachelor’s Degree in Actuarial Science from the Instituto Tecnológico Autónomo de México (ITAM). At HPL, she has contributed to the execution of 5 consulting projects by conducting research, performing comparative studies, structuring thematic Bond Frameworks and preparing reports for development banks and sovereigns in LAC. Previously, Fernanda worked at Citigroup as a ICG Operations Summer Analyst, where she conducted comparative analysis of KPIs and collaborated in implementing improvements in tracking processes. Prior to this, she was an intern at Samsung Electronics Mexico, where she generated detailed reports on training-related KPIs and contributed to the creation of innovative materials. Her focus is on finance, sustainable finance, consulting, and corporate banking..
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References
[1] HPL. (2025). HPL Proprietary Bond Database. Not available online.
[2] HPL. (2025). HPL Proprietary Bond Database. Not available online.
[3] SEB Group. (2025). Sustainable Bond Market Snapshot. Available online.
[4]de Mariz, Frederic, Pieter Bosmans, Daniel Leal, and Saumya Bisaria. (2024). Reforming
Sustainability-Linked Bonds by Strengthening Investor Trust. Journal of Risk and Financial Management 17: 290. Available online.
[5] OECD. (2024). Sustainability-linked bonds -How to make them work in developing countries, and how donors can help. Available online.
[6] de Mariz, Frederic, Pieter Bosmans, Daniel Leal, and Saumya Bisaria. (2024). Reforming
Sustainability-Linked Bonds by Strengthening Investor Trust. Journal of Risk and Financial Management 17: 290. Available online.
[7] CBI. (2024). Sustainability-Linked Bonds: Building a HighQuality Market. Available online.
[8] Ibid 7.
[9] de Mariz, Frederic, Pieter Bosmans, Daniel Leal, and Saumya Bisaria. (2024). Reforming
Sustainability-Linked Bonds by Strengthening Investor Trust. Journal of Risk and Financial Management 17: 290. Available online.
[10] Ibid 10.
[11] IFC. (2023). Making Sustainability-Linked Bonds More Impactful. Available online.
[12] World Bank. (2022). Structural Loopholes in Sustainability-Linked Bonds. Available online.
[13] CBI. (2024). Sustainability-Linked Bonds: Building a HighQuality Market. Available online.
[14] ICMA. (2023). Sustainability-Linked Bond Principles. Available online.
[15] OECD. (2024). Sustainability-linked bonds -How to make them work in developing countries, and how donors can help. Available online.
[16] Lester, Arhen. (2025). ‘SLBs can be the right tool for impact investing’ urge investors.Available online.
[17] CBI. (2024). Sustainability-Linked Bonds: Building a HighQuality Market. Available online.
[18] Ibid 17.
[19] Lester, Arhen. (2025). SLBs: ‘Flight to quality’ amid complexity challenge could be a positive. Available online.
[20] Ibid 19.
[21] Lester, Arhen. (2025). ‘Sovereigns should use ASCOR for SLBs’. Available online.