H&M Launches Inaugural Sustainability-Linked Bond

    Stockholm (NordSIP) – In our review of sustainable bond markets during last year, sustainability-linked bonds stood out as the format that could help push 2021 issuance to heretofore unseen heights. Sustainability-linked bonds differ from other sustainable bonds because instead of earmarking funds for specific types of sustainable projects, they promise to punish borrowers in case they fail to meet pre-specified sustainable goals. The format appears to be appealing and has brought issuers such as Channel to the market.

    Now, H&M Group has joined this trend with an 8.5 year €500 million sustainability-linked bond that pays an annual coupon rate of 0.25%. In this case, H&M Group has committed to achieving three main targets by 2025. First, it will increase the share of recycled materials used to 30% as per the reference year of 2025. Second, it will reduce emissions from the Group’s own operations (Scope 1 and 2 GHG emissions) by 20% as per the reference year of 2025 from a 2017 baseline. Lastly, it will also reduce absolute Scope 3 emissions from fabric production, garment manufacturing, raw materials and upstream transport by 10% as per the reference year of 2025 from a 2017 baseline.

    “Sustainalytics is of the opinion that the H&M Group Sustainability-Linked Bond KPIs are relevant and material to the issuer and that the SPTs are ambitious and impactful. The goal to reach 30% recycled materials as inputs is a highly ambitious SPT (Sustainability Performance Target) and represents leadership in the clothing industry,” says Evan Bruner, Project Manager, Sustainalytics.

    The punishment associated with sustainability-linked bonds corresponds to a “step-up” in the coupon payment. In this case, the “step-up” is valid from April 2026. The coupon will increase by 10 basis points (bps) in case H&M fails to meet the first target (Recycled Materials Event), 5bps if it fails to meet the second target (Scope 1 and 2 GHG Emissions Event) and 10bps if it fails to meet the third target (Scope 3 GHG Emissions Event).

    “For H&M Group, sustainability is an integral part of our operations. This type of bond creates a clear and transparent commitment and incentive for the company. It is an important step in our continued work to optimise the company’s capital structure, while at the same time providing investors with an opportunity to contribute to positive transformation of the fashion industry,” says Adam Karlsson, CFO of H&M.

    The bond was priced at 50bps over mid-swaps, down by half from initial price thoughts, to yield 0.397%, thanks to €5.4 billion in investor bids. Demand was diversified, although Nordic investors (37%) were dominant. Geographically, German/Austrian (18%), UK/Ireland-domiciled (14%), French (11%), Southern European (8%), Benelux (8%), Swiss (3%) and other miscellaneous (1%) investors also contributed to the demand. Sectorally, most of those investors were fund, which represented 74% of demand. Insurers and pension funds purchased another 7% of the bonds, followed by official institutions and agencies (13%), banks (5%) and other financial institutions (1%).

    BNP Paribas, Commerzbank, Danske Bank, SEB and Standard Chartered acted as joint lead managers on this transaction. SEB also acted as advisor for the Sustainability-Linked Bond Framework.

    “There is a fantastic interest in the market for Sustainability-Linked Bonds right now and this first transaction was just the starting point of a trend that we expect to grow in 2021. We had a number of questions on investor behaviour in regards of the format, I think all those questions was answered by the blow-out investor interest in this inaugural H&M Sustainability-Linked Bond offering. As we track the migration of fund flows from normal bond funds to ESG-bond funds, there was no surprise that this would be a success – but 180 accounts and EUR 3.8bn in final books at these levels is nothing but fantastic!”, says Lars Mac Key, Head of Sustainable Bonds at Danske Bank.

    Imag courtesy of H&M

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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