Sustainable financial products, such as green and social bonds and sustainability-linked loans, are hybrid instruments: though structured as private law contracts between financial actors, they are also designed to advance global public goods such as environmental protection and social equity, extending their impact beyond the contracting parties. Their governance involves a layered combination of private law doctrines, transnational standards, and public law frameworks. This article examines the compliance challenges that arise when issuers or borrowers of sustainable debt instruments fail to fulfil their stated sustainability commitments—a phenomenon we term ‘green defaults’. We argue that these defaults exemplify a wider challenge in sustainability regulation: the increasing reliance on private contractual instruments to achieve public goals. This study critically evaluates the polycentric regulatory regime to assess whether it creates adequate incentives for firms to shift from low-credibility, or ‘green junk’, instruments to more robust products of sustainable finance.
Perez et al. (Thu,) studied this question.