Policy Performance Bonds

Policy performance bonds are a simple, and somewhat subversive, idea introduced by Z/Yen in 2005 as part of discussions during the formation of the London Accord. They started being adopted for corporate bonds in 2017, also known as performance incentive bonds or policy performance bonds due to some informal sponsorship of the idea by the French government by the Prime Minister's think-tank (they allowed Professor Mainelli to publish in English!, at first) during COP21 in 2015. This bond sector has been growing rapidly to become a significant portion of the wider 'green bond' market, and spreading outside Europe.

Professor Mainelli's original idea was more directed towards governments than corporates, particularly for preventing climate change. In the case of carbon emissions reduction targets, for example, a policy performance bond (also termed an index-linked carbon bond) is a government issued bond where, in its simplest form, interest payments are linked to the actual greenhouse gas emissions of the issuing country against published targets. An investor in this bond receives an excess return if the issuing country’s emissions are above the government’s published target.


A policy performance bond thus provides a hedge against the issuing country’s government, or a corporate organisation, not delivering on its commitments or targets. Policy performance bonds can be issued against carbon emissions reduction targets but also forest preservation targets and any other area where policy risk is significant. In the case of index-linked carbon bonds, the ability to hedge enables the same investor to invest more confidently in projects or technologies that pay off in a low-carbon future because if the low-carbon future fails to arrive the government too bears direct costs of having to pay higher interest rates on government debt. Index-linked carbon bonds eliminate the one risk that differentiates clean tech projects from other energy projects, the uncertainty of government policy actually being directed at a low carbon future. Examples of potential indices that address this unique risk are:

  • Levels of greenhouse gas emissions;
  • Levels of feed-in tariffs for renewable energy or percentage of renewable energy in overall energy supply;
  • Prices of emission (reduction) certificates in a trading system;
  • Levels of taxes on fossil fuels or fossil fuel end-user prices.

The idea was first formally presented by Dr Kevin Parker of Z/Yen at the World Bank Government Borrowers' Forum in Ljubljana in May 2009. The same idea can be used for index-linked forestry bonds on forestry cover, etc. Since first mooted by Long Finance in 2008 & 2009, the private sector began issuing these bonds, tying interest rates inversely to performance against the achievement of environmental, social, or governance goals (our touchstone, as opposed to saying the proceeds will be used for ESG purposes), in 2017. The terms "sustainability-linked finance" or "positive incentive loan" are sometimes used:

A series of bond 'flavours' seem to be emerging, in increasing order of earnestness:

  • green (claim that proceeds will be used for green projects);
  • sustainability or ESG (claim that proceeds will be used for wider ESG goals);
  • sustainability or ESG where the issuer will report directly on the target(s), e.g. Alphabet/Google's US$5.75 billion (2020) issue will report on progress of project investments in energy efficiency, renewable energy, green buildings, clean transport, circular economy & design, affordable housing, racial equality, and support for small businesses in the wake of Covid-19;
  • policy performance bonds – where the issuer puts its money where its mouth is, i.e. interest payments are linked to achievement.

We are delighted with the help we got in France to push the idea among French and Continental corporates. We're particularly pleased with Chile, but also rapid market growth:

"Global sales of sustainability-linked bonds, a subset of ESG debt, hit a record $110 billion last year, compared with $11 billion issued in 2020, according to data compiled by Bloomberg. Moody’s ESG Solutions expects issuance of the debt to hit $150 billion this year."

Bloomberg (22 February 2022)

So, which other governments are prepared to put monies where their policy mouths are?

Related Reports:


Sovereign Sustainability-Linked Bonds: Chile Sets A High Bar - This supplement to the ninth edition of the Global Green Finance Index takes as it subject green-bonds, a product which has been credited with turbo-charging the green finance revolution. In this report we examine the lessons learned by Chile in the development of a new type of green bond — sovereign sustainability-linked bonds (aka policy performance bonds), which are likely to have a significant impact on sovereign debt markets as other nations join Chile to deliver sustainable growth.

An even briefer two page summary is here:

Related Books:


L’Innovation Financière Au Service Du Climat: Les Obligations Á Impact Environnemental

by Abdeldjellil Bouzidi & Michael Mainelli,

ISBN 978-2-86-325784-5

February 2017

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