Green, Social and Sustainability-Linked BondsSLB
Green and social bonds raise money for specified environmental or social projects. Sustainability-linked bonds work differently: the money can be used for anything, but the coupon changes if the issuer misses agreed sustainability targets. Labels follow voluntary guidelines, so the details vary.
Some bonds carry a label that tells investors something beyond the coupon and maturity: what the money will fund, or what targets the issuer promises to meet. Green, social and sustainability bonds are about where the proceeds go. Sustainability-linked bonds are about the issuer’s performance. This entry explains the main labels, the guidelines behind them, and what investors should check.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Green bond, Social bond, Sustainability bond
- Updated
Labelled bonds in plain words
A green bond is an ordinary bond whose proceeds are earmarked for environmental projects. Market guidelines ask issuers to report how the money is used, so investors can track it.1
Social bonds work the same way for projects with positive social outcomes.2 Sustainability-linked bonds instead tie the bond’s terms to key performance indicators chosen by the issuer.3
How a green bond is issued, step by step
Set a framework
The issuer defines which projects qualify.
Get an external review
An independent reviewer checks the framework against the guidelines.1
Issue the bond
Pricing, coupon and ranking work like any other bond.
Allocate the proceeds
Money goes to eligible projects over time.
Report
The issuer reports on allocation and estimated impact.1
Repay as normal
Investors are paid by the issuer, not by the projects.
Worked examples
Example 1 — An allocation report
TransparencyA company issues a $500 million green bond. After a year it reports $300 million spent on solar farms and $150 million on electric rail.
| Allocated | $300m + $150m = $450m |
| Share allocated | $450m ÷ $500m = 90% |
Allocation reports let investors check that proceeds reached eligible projects.
Example 2 — A sustainability-linked step-up
Step-upAn investor holds $1,000,000 of a sustainability-linked bond paying 4.00%. The issuer misses its emissions target, so the coupon steps up by 0.25%.
| Coupon before | $1,000,000 × 4.00% = $40,000 |
| Coupon after | $1,000,000 × 4.25% = $42,500 |
The issuer pays more for missing its target; the investor receives more income.
Example 3 — Same issuer, same risk
Issuer riskA company has a green bond and an ordinary bond with the same maturity and ranking. It defaults.
| Green bond | Same claim as other senior debt |
| Ordinary bond | Same claim as other senior debt |
The label describes the use of proceeds, not extra protection. Credit risk is the issuer’s. See Default Risk.
Use-of-proceeds bonds vs. sustainability-linked bonds
| Aspect | Green / social bonds | Sustainability-linked bonds |
|---|---|---|
| What is labelled | Where the money goes | The issuer’s performance |
| Use of proceeds | Eligible projects only | General purposes |
| Key feature | Allocation and impact reporting | KPIs and targets |
| If promises are missed | Reputational damage | Usually a coupon change |
Why labelled bonds matter
Mandates
Some funds may only buy labelled or ESG-aligned debt.
Issuer funding
Labels can broaden the investor base.
Pricing
Strong demand can lower yields slightly.
Greenwashing checks
Frameworks and reviews help separate real projects from marketing.
Advantages and disadvantages
Advantages
- Clear information on what the money funds.
- Regular allocation and impact reports.
- Same credit structure as ordinary bonds.
Disadvantages
- Mostly voluntary guidelines, so quality varies.
- Greenwashing risk if projects are weak.
- Impact figures are estimates.
- Slightly lower yields in some cases.
Going deeper
Read as far as you need. Each level builds on the one before it.
Voluntary guidelines
Beginner
The Green Bond Principles are voluntary process guidelines that promote transparency and disclosure.1 Issuers choose to follow them; they are not law.
The European green bond standard
Intermediate
Choosing KPIs
Advanced
For sustainability-linked bonds, credibility depends on meaningful KPIs and ambitious targets. ICMA keeps a registry of illustrative KPIs to guide issuers and investors.3
Common mistakes
Thinking green means safer
Credit risk is the issuer’s, not the project’s.
Skipping the framework
Read what actually qualifies.
Confusing the two families
Use-of-proceeds and sustainability-linked bonds work differently.
Trusting impact numbers blindly
They are estimates, often self-reported.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Green and social bonds earmark proceeds for eligible projects.
- Sustainability-linked bonds tie terms to issuer targets.
- Most labels follow voluntary guidelines.
- Credit risk is the same as the issuer’s other bonds.
- Check the framework, external review and reports.
Frequently asked questions
Are green bonds safer than ordinary bonds?
Who checks that a bond is really green?
What is a sustainability bond?
Further learning
- Coupon Rate
What changes in a step-up.
- Default Risk
The risk a label does not remove.
- Credit Spread
How labelled bonds are priced.
- Yield to Maturity
Comparing yields across bonds.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- ICMA. Green Bond Principles (GBP) (opens in a new tab) Checked .
- ICMA. Social Bond Principles (SBP) (opens in a new tab) Checked .
- ICMA. Sustainability-Linked Bond Principles (SLBP) (opens in a new tab) Checked .
- European Commission. The European green bond standard – Supporting the transition (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.