Lab 1: Scaling the Market for Outcome-Based Finance

Outcome-based finance refers to financial products structured around the issuer’s commitment to predefined performance targets linked to the SDGs that are monitored through key performance indicators (KPIs). It typically includes debt products known as sustainability-linked bonds (SLBs), loans, credit lines, and commercial paper programs. It can also include derivatives and hedging contracts to de-risk, or reduce the risk of, SDG investments or projects. 

The market for outcome-based finance holds great potential as demonstrated by the rapid growth of SLBs since their introduction by the energy company Enel in 2019.

These products are attractive to companies because they are not tied to specific investments. Instead, they provide general-purpose financing to support companies’ overall SDG strategy,with financing conditions linked to the achievement of SDG-related targets.Outcome-based financing thus allows a more diverse range of companies to raise sustainable finance, as it supports all the types of corporate investments necessary to create more sustainable solutions. For investors, it provides powerful contractual leverage to ensure that corporate investments, which makeup most of their portfolio, are following a sustainable path. It also brings companies from all sectors and geographical areas to the market, allowing for portfolio diversification.

Sustainability-linked finance presents an incredible opportunity to leverage capital market efficiency and transparency to explain issuers’ sustainability path (including transition) and allow investors to make educated choices about the most sustainable pathways, over time. This market-based approach creates flexibility to experiment with credible and reliable sustainability solutions and financial products and rewards constant innovation in both areas.
CFO Insights

Data collected by Moody’s between June 2020 and June 2021 shows a diverse range of companies participating in the sustainability-linked bond market.

However, to fulfills its promise of creating a mainstream market for SDG investment, outcome-based finance must continue to evolve to become a financing vehicle for corporate SDG performanceand innovation.

The lab focused on three critical areas for scaling the market for outcome-based finance:

  • Integrated corporate finance approach.Ensuring that outcome-based products are part of a broader corporate finance strategy that supports a company’s SDG strategy and investments and leverages existing corporate-governance mechanisms.
  • Ambitious and competitive targets.Ensuring that targets and KPIs used in outcome-based finance are competitive and ambitious enough to put companies on a sustainable path.
  • Meaningful reward for performance. Ensuring that the financial characteristics of outcome-based finance provide meaningful incentives for companies to achieve sustainability goals.