Stockholm (NordSIP) – Sustainability-linked Bonds (SLBs) have been a vehicle for the growth of sustainable finance since Italian utilities giant first issued such bond at the end of 2019. However, this market has not been without its issues and concerns have emerged that the format may be under pressure on political, regulatory and performance fronts.
This week, on the performance front, the Anthropocene Fixed Income Institute (AFII) published a review of 24 Sustainability-Linked Bonds that have targets due in 2024, including an assessment of whether or not these goals will be achieved. The report argues that three bonds are likely to miss their targets, while it is a coin-toss whether another four bonds will achieve their goals.
“Understanding the likelihood that a Sustainability-Linked Bond (SLB) issuer will hit or miss a sustainability target is essential to investors. This knowledge is important when it comes to pricing these instruments and can determine how and when investors should engage with companies to accelerate their sustainability performance”, the report’s authors, Josephine Richardson, Managing Director and Head of Research, and Patricia Hutchinson, Associate Research Director, argue.
The Coin-Tosses
The AFII considers four bonds to have a “50:50” chance of achieving their goals: Coca-Cola Femsa (Beverages, Mexico), Eni SpA (Energy, Italy), Hapag-Lloyd (Shipping, Germany) and Legrand (Industrial, France).
Coca-Cola Femsa has missed two SLBs aiming to reduce its water use ratio per litre of beverage produced to 1.36. According to the authors, the “evidence combines to suggest the target is still a stretch. The annual improvement needed is equal to its best performance over the past four years.”
Eni is the only major oil company to have issued SLBs. Among other goals, the bonds aim to reduce upstream emissions by 7.4mtCO2e by December 2024. After analysing historical figures for reducing emission since 2018, the AFII analysis concludes that a “simple extrapolation of the recent trend would suggest the target will narrowly be missed.” However, the key performance indicator (KPI) is a net figure that includes high-quality carbon credits. “The ability to reduce the KPI through offset purchases significantly increases the chance of achieving the target,” the AFII review notes.
Hapag-Lloyd has a €300 million SLB outstanding, which aims to reduce the Average Efficiency Ratio (AER) to 6.83 by 2024 a trajectory defined from a 2008 baseline. According to the AFII, “the majority of the reduction versus trajectory was from 2008-2018.” However, in light of the high volatility of the actual AER the AFII analysis notes that “there is scope for question as to whether the target will be hit and so we have classified this SLB in the 50:50 category.”
Legrand, has a €400 million SLB outstanding, with the goal of obtaining supplier-committed emissions reduction targets of 400 ktCO2e, engaging 250 key suppliers to have emissions reduction targets by 2024 and have women representation in managerial positions of 30% by 2024. The AFII note that these “KPIs present challenges in estimating the likelihood of success.”
The Likely Misses
The three bonds likely to miss their target are A2A SpA (Utilities, Italy), EC Finance (AKA Europcar) (Rental Vehicles, France) and London & Quadrant Housing (Property, UK).
A2A SpA has a €500 million SLB aiming to increase the installation of renewable energy capacity, with a target of reaching an installed capacity of 3.0 GWh by 2024. “A2A is taking steps forwards in renewable installation, but of small magnitude. (…) The increase needed to achieve the target is higher than any yearly increase achieved to date. More relevantly, notwithstanding immediate renewables decommissioning, a miss is being predicted by the company itself,” the AFII warns.
EC Finance (Europcar) has a €500 million SLB with three goals: To reduce the average emissions intensity of cars in the company’s fleet from 120gCO2/Km in 2019 to 93 gCO2/Km; to reduce the average emissions of vans in the company’s fleet from 186 gCO2/Km to 144 gCO2/Km by 31 December 2024; and to have green vehicles account for 20% of its fleet by the end of 2024. Noting data gaps and disappointing trends in demand for EV vehicles from rental car customers, the AFII warns that “delivering on its targets is not entirely within the direct control of EC Finance, but rather dependent on overall transition of customer demand, which has been slow. Significant improvement is needed from the latest reporting to achieve the targets, and there is no evidence available that the sector has reached a point where such a level of decarbonisation can be achieved.”
London & Quadrant Housing has an outstanding SLB aiming to reduce Scope 1 and 2 emissions by 20%, to achieve a minimum average energy efficiency, and to build new affordable homes. The AFII prediction appears to be informed by a March, 20th, 2024 note from L&Q Housing informing the the market that the emissions target would likely be missed.
Still a Force for Good
Despite these seven SLBs, the report concludes that a majority of the 24 SLBs under consideration will meet their targets. This is good news. Considering the general universe of their analysis, Ricardson and Hutchingson conclude that “in all cases, the SLB has been a positive tool to elevate dialogue on sustainability performance for these issuers. When investors own a security with a value dependent on a KPI, this promotes transparency, dialogue and ultimate engagement, towards stronger sustainability performance.”
