Impact Measurement for Sustainability-Linked Bonds

This project aimed to address a critical gap in the realm of sustainability-linked bonds by developing an effective methodology for setting and evaluating impact targets. The absence of rigorous impact evaluations and forecasts for fixed-income municipal bonds impedes the development of a tax-exempt product under IRS contingent payment rules. Typically, these regulations treat any alteration in coupon or yield as a taxable circumstance. 

Barclays, believes that a solution lies in the establishment and communication of potential outcome probabilities, allowing for coupon adjustments based on performance without affecting tax-exemption status. To actualize this, the SIPA Capstone team performed a feasibility study to identify service providers who can provide a legally binding, statistical opinion on the sustainability outcomes of a Sustainability-Linked Bond (SLB). The goal was to identify technical capacities in the market capable of defining key KPIs for this assessment. 

The SIPA Capstone team’s approach encompasses a review of existing SLB frameworks, feasibility studies, and environmental impact bond documentation. The team also conducted interviews with service providers, academic experts in climate modeling and sustainability metrics, and specialized engineering firms capable of conducting probabilistic assessments. The final deliverable will provide Barclays with a comprehensive guide to engaging service providers and include both sector-agnostic and sector-specific RFP-grade evaluation criteria. By pioneering this analytical approach, the team hopes to enhance the sustainable bond market, driving robust impact measurement and accountability.