Emerging Insight: Setting robust social key performance indicators in sustainability-linked finance
9 November 2023
How can borrowers be incentivized to make their workplaces more inclusive? How can we encourage them to improve occupational safety and health in their businesses? Sustainability-linked finance ties financial and sustainability outcomes and can give answers to such questions. A new discussion paper by the IFC, Social KPIs matter, explores the current landscape of sustainability-linked finance and looks ahead at what might drive the next generation of social indicators. The ILO and Social Finance contributed to the development of this paper by providing inputs, especially on social outcomes and the just transition.
Sustainability-linked finance instruments tend to be issued mostly by large corporates, predominantly based in Europe and Central Asia (52 per cent) and in most cases using KPIs focused on the environment (69 per cent).
However, the market for sustainability-linked finance is changing and it is becoming more diverse. For example, as of June 2023, low and middle-income countries totalled US$113 billion, or 7 per cent of the total issued volume. Moreover, social indicators will likely receive more attention in the years to come, as market actors grow increasingly aware of the links between environmental and social outcomes and the need to promote a just transition. Other drivers of this change include a growing focus on sustainable supply chains and topics such as diversity and inclusion.
In a sustainability-linked finance instrument, such as a bond or a loan, the interest rate paid by the borrower can be reduced if they reach a pre-defined performance indicator. For example, an energy company based in Brazil issued a bond which can have a reduced interest rate if it increases the share of female electricians hired from a baseline of 0.8 per cent in 2019 to 10.7 per cent in 2026.
In the paper, the IFC describes the commonly used social KPIs in these instruments, such as the share of female workers in different levels of an organization, the gender wage gap and the number of training hours dedicated to occupational health and safety. The paper also points to key actions to help companies and financiers grow the use of social KPIs. These are:
Read the IFC publication paper to learn more about sustainability-linked finance for social change.
Sustainability-linked finance instruments tend to be issued mostly by large corporates, predominantly based in Europe and Central Asia (52 per cent) and in most cases using KPIs focused on the environment (69 per cent).
However, the market for sustainability-linked finance is changing and it is becoming more diverse. For example, as of June 2023, low and middle-income countries totalled US$113 billion, or 7 per cent of the total issued volume. Moreover, social indicators will likely receive more attention in the years to come, as market actors grow increasingly aware of the links between environmental and social outcomes and the need to promote a just transition. Other drivers of this change include a growing focus on sustainable supply chains and topics such as diversity and inclusion.
In a sustainability-linked finance instrument, such as a bond or a loan, the interest rate paid by the borrower can be reduced if they reach a pre-defined performance indicator. For example, an energy company based in Brazil issued a bond which can have a reduced interest rate if it increases the share of female electricians hired from a baseline of 0.8 per cent in 2019 to 10.7 per cent in 2026.
In the paper, the IFC describes the commonly used social KPIs in these instruments, such as the share of female workers in different levels of an organization, the gender wage gap and the number of training hours dedicated to occupational health and safety. The paper also points to key actions to help companies and financiers grow the use of social KPIs. These are:
- Identify material social issues and set relevant and credible KPIs;
- Benchmark and establish baseline performance using company records and external data sources;
- Create a roadmap for achieving ambitious targets, including interim milestones;
- Ensure transparency through regular and comprehensive reporting.
Read the IFC publication paper to learn more about sustainability-linked finance for social change.