Environmentally minded investors, take note: we think a controversial new bond format that links a company’s sustainability goals to its bottom line could be a game changer in building a more sustainable future—and a welcome complement to “labeled” green bonds, which are project-specific.

The new format is exciting because it does two things. First, it puts the focus on a company’s sustainability goals. Second, it ensures that the company has skin in the game by penalizing it if it fails to meet those goals, which are explicitly written into the bond documentation.

Italian utility Enel, a major issuer of more traditional green bonds in the past, recently embraced this new approach when it issued a bond that pins the company’s renewable energy goals to its bottom line. If Enel falls short of having 55% of its electricity generation capacity in clean energy by the end of 2021—up from 46%—the bond’s coupon rises by 0.25%.

Rewarding Sustainability

The way we see it, there’s a lot to like here. Yes, it’s true that funds raised from bonds structured in this way are directed toward a company’s general operating expenses rather than a specific project, as is the case with green bonds. But buying a general-purpose bond is appealing because the bond is structured so that it effectively rewards companies for having a sustainable business model.

Enel’s goals are based on some of the United Nations’ Sustainable Development Goals (SDGs), such as providing access to affordable and sustainable energy and taking urgent action to combat climate change and its effects. We’ve written before that the SDGs provide a good road map for investors who want their investments to have an impact.

Overall, we consider this new structure a positive development and hope to see more issues—and innovations—like it.