Sustainable Finance

What is sustainable finance?

Sustainable finance means directing money toward activities that are good for people and the planet — not just profitable. It asks a simple question: can we make investment decisions that consider long-term environmental and social outcomes alongside financial returns? Similar concepts include climate finance, green finance, and transition finance.

In practice, it requires taking environmental, social and governance (ESG) considerations into account when making investment decisions, leading to more long-term investments in sustainable economic activities and projects.

What does it mean in practice?

Sustainable finance prescribes both what gets funded and how it gets funded. A range of financial tools has been developed to put sustainable finance into practice. You may have heard of green bonds, green loans, or sustainability-linked bonds or loans.

Below are a few common sustainable finance products as defined by global frameworks such as those of the International Capital Market Association (ICMA):

• Green Bonds finance new or existing projects with clear environmental benefits, such as renewable energy, clean transport, or sustainable water management. ICMA’s Green Bond Principles are widely used as global guidelines and recommendations on transparency and disclosure when issuing such bonds. Proceeds from bond issuance must be ring-fenced for eligible projects, and issuers must report on how funds were used.

• Social Bonds are use-of-proceeds bonds that raise funds for new and existing projects with positive social outcomes for a defined target population. Eligible project categories include healthcare, education, affordable housing, and food security. Similarly, the Social Bond Principles provide voluntary guidelines and best practice recommendations to issuers to ensure the integrity of such instruments.

• Sustainability Bonds are bonds where the proceeds will be exclusively applied to finance or re-finance a combination of green and social projects. They are well-suited to large infrastructure projects that deliver environmental and social benefits simultaneously.

• Sustainability-Linked Bonds and Loans do not restrict the use of proceeds. Instead, the interest rate moves up or down depending on whether the borrower meets pre-agreed sustainability performance targets. The Sustainability-Linked Bond Principles provide guidelines that recommend structuring features, disclosure and reporting.

• Climate Transition Bonds are a standalone instrument designed to help finance or refinance critical projects for achieving the goals of the Paris Agreement, especially from those in high-emitting sectors. The new label was introduced in late 2025 through the Climate Transition Bond Guidelines. One of the key criteria to ensure the integrity of such instruments is the existence of an issuer-level sustainability and/or climate transition strategy.

• Blended Finance is not a debt instrument but a financing structure. Blended finance aims to encourage private investment in low- and middle-income countries by leveraging development funds. In practice, public or development funds take more risk initially, making projects viable for private investors who would otherwise not participate.

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