CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Green Initiatives
Vanya Textiles Ltd. issued a bond whose coupon rises by 25 basis points if the company fails to cut its Scope 1 and 2 emissions by a stated percentage by a set date. The proceeds may be used for general corporate purposes. The company secretary should classify this bond as:
It is a sustainability-linked bond, because the coupon changes depending on whether the company meets predefined emission-reduction targets, while the proceeds can be used for general purposes. A green bond would require proceeds earmarked for green projects.
- AA green bond, because it mentions emissions
- BA sustainability-linked bond, because its financial terms depend on meeting predefined sustainability performance targetsCorrect
- CA transition bond restricted to specific projects
- DA plain vanilla bond, because the coupon changes only on default
Explanation
The coupon step-up tied to an emissions target is the hallmark of a sustainability-linked bond. Proceeds are unrestricted, so it is not a green bond, which needs use-of-proceeds earmarking. It is not plain vanilla because the coupon depends on a non-financial target.
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