Integrating Finance With Environmental Sustainability – Sustainability-linked Finance Market

sustainability linked finance market

The sustainability-linked finance market is projected to witness a compound annual growth rate of 98.32% to grow to US$17,311.992 billion by 2026, from US$143.472 billion in 2019.

Sustainability-Linked Financing refers to performance-based financial instruments that do not limit the use of financing supplied through sustainability-linked channels and allow the issuer or borrower to use the money for any defined purpose, not just green expenditures, and activities. Furthermore, sustainability-linked finance enables businesses to enhance their sustainability performance by allowing them to use sustainability disclosures to get access to a fast-developing credit market that is fuelled by sustainability-linked financing.

Innovative Way of Financing to Facilitate Brand Image

The incorporation of ESG practices into financial decision-making processes is referred to as sustainable finance. Over the last two decades, the importance of sustainable finance has increased at an exponential rate. Sustainable Finance has evolved over decades from a technique for ethical investors to screen inept firms out of their portfolios to an essential element of risk management strategies for banks and other financial institutions. With a bright future ahead of it, sustainable finance is expected to develop into a technique used by investors to find and explore innovative possibilities that standard financial analysis misses.

Sustainability-linked bonds and sustainability-linked loans are two types of sustainability-linked financial products. The market’s expansion has been fueled by the rules and principles that govern how these financial products operate. Similarly, recent innovations in the market for Sustainability Linked Bonds have boosted demand for sustainable-linked financial products even further.

Recent Advancements in the Market Pave a Systematic Path for Market Growth

Similarly, recent advancements in the market for Sustainability Linked Bonds have boosted demand for sustainable-linked financial products even further. Sustainable bond guidelines (2018), Sustainable bond guidelines (2018), and Sustainability-Linked Bond principles (2020), among others, were recently issued by the International Capital Market Association (ICMA) and have aided in addressing investor concerns about greenwashing and providing assurance to bondholders. Similar efforts have been implemented for sustainability-linked loans, boosting investor trust and moving the sustainability-linked financing industry forward.

Flexibility for Use of Proceeds to Increase Market Adoption

Furthermore, issuers and borrowers are quickly adopting sustainability-linked financing due to the flexibility in generating sustainable finance while keeping complete control over how the profits are used. Financial institutions and investors are increasing their participation in sustainability-linked instruments due to the ability to retain full recourse over the borrower or issuers by ensuring that the borrowers or issuers’ SPT is subject to external verification or reporting through the terms of the instruments.

Favorable Association to Corporate Identity to Augment Market Demand

Moreover, both commercial and investment banks find sustainability-linked financial products appealing because they want to be seen as organizations that are committed to good corporate citizenship. For borrowers, sustainability-linked financial instruments provide an additional source of funding and may prove to be more cost-effective than traditional options.

Market Expansion Fueled by the Advent of the COVID-19 Pandemic

The openness and accountability provided by the system are one of the major motivations for the increased adoption of sustainability-linked funding. This is especially essential now that COVID-19 has emerged because society is increasingly turning to companies to lead the way in averting these catastrophic disasters. Furthermore, businesses in a variety of industries have experienced losses and are seeking ways to fund their recovery efforts; here is where sustainability-linked finance comes in to help these businesses reduce their cost of capital even further.

According to BNP Paribas research, as reported by the Wall Street Journal, governments, banks, companies, and others raised a little more than $150 billion globally from selling pandemic bonds as of the end of May 2020 to fund the manufacturing of vaccines or treatments, facilitate healthcare systems fighting the outbreak or provide relief to citizens.

Unpri Incorporating Esg Issues Into Investment Practice Propel the Market Size

The United Nations-supported Principles for Responsible Investment is a worldwide network of investors working together to implement six ambitious principles based on the premise that environmental, social, and governance (ESG) concerns may impact the profitability of investment portfolios. The United Nations Principles for Responsible Investment (UNPRI) is a long-running voluntary effort that was established in 2005 to incorporate ESG problems into investment practice. The UNPRI focuses on the inclusion of ESG concerns into investment analysis and ownership rules, as well as the disclosure of ESG issues, among other things. As a result, the UNPRI is a major driver of the sustainability-linked financing industry.

Adoption of the Equator Principles for Managing Esg Risks to Augment Market Growth

The Equator Principles is a risk management system advocated by financial institutions for intuiting, analyzing, and regulating environmental and social risk in finance. Although adoption of the Equator Principles is voluntary, many financial institutions in the project financing sector utilize them as a key instrument for controlling ESG risks and consequences. The Equator Principles set the stage for subsequent debt market sustainability efforts.

Structural Factors and Associated Variables to Incline Slf Adoption

Furthermore, additional variables such as changes in demand and supply for climate reporting, the drive for improved climate change risk management, and advancements in reporting and risk analysis are allowing investors to see the benefits of climate-friendly investments. Additionally, structural factors such as comparatively reduced pricing, incentive mechanisms, brand image linkage, and market standardization have all aided the expansion of the sustainability-linked financing sector.

Lack of Uniformity and Inconsistent Methodologies to Restrain the Market Growth

There is uncertainty about what defines a sustainable project due to a lack of uniformity among worldwide ESG programs. Stakeholders are concerned because of the uncertainty. Furthermore, there appears to be insufficient consistency in the construction and comparability of ESG rating methodologies, despite significant progress in this area, which includes efforts by credit rating agencies, specialized firms, and market participants to dig up a significant amount of transparent and demonstrable data.

Emerging Trends in the Market Provide Room for Opportunities

Corporates of all sizes have an undeniable potential to benefit from access to new creative funding sources from lenders that recognize the worldwide shift in investor attitude. Green and sustainability-linked financial solutions are becoming increasingly accessible as financial institutions focus on ensuring that their lending fulfills their commitment to sustainability objectives. It has become clear that sustainable finance will play a critical role in a long-term and unstoppable post-pandemic global economic recovery to ‘build back better and greener’ without going backward.

Europe to Hold a Significant Share in the Market

Europe, the Nordics, and the United States will have the fastest growth in the next five years since they are substantially investing in sustainable linked loans, which will eventually boost their total growth. As more companies try to integrate financial and sustainability initiatives into their business models, there is plenty of potential for expansion.

Global Sustainability-Linked Finance Market Scope:

Report Metric Details
 Market size value in 2019  US$143.472 billion
 Market size value in 2026  US$17,311.992 billion
 Growth Rate  CAGR of 98.32% from 2019 to 2026
 Base year  2019
 Forecast period  2021–2026
 Forecast Unit (Value)  USD Billion
 Segments covered  Instrument Type, Performance Metric, Sector, And Geography
 Regions covered  North America, South America, Europe, Middle East and Africa, Asia Pacific
 Companies covered  Amazon, Anheuser Busch Inbev, Micron Technology, HongKong Land, UPL Limited,   Financial Institutions, HSBC Holdings PLC, Goldman Sachs Group Inc., Nordea Bank   ABP, BNP Paribas, ING Group, VIgeo Eiris, Sustainalytics, Refinitiv, FTSE Russell,   MSCI Inc.
 Customization scope  Free report customization with purchase