The rise of Use of Proceeds & Sustainability-Linked combinations

“Two thumbs up!” was the comment from one investor when presented with a combined Use of Proceeds (UoP) and Sustainability-Linked Bond (SLB). While such a ‘double’ may be too onerous for many issuers, we are increasingly seeing firms setting up sustainable financing frameworks that allow access to both markets. 

So, what are their characteristics? Based on a sample of 13 financing frameworks, we have noticed the following:

  • The majority of companies cite strategic reasons for choosing dual-purpose frameworks: 62% in our sample said that these frameworks help them to reach their ESG goals. Utilising both sustainable finance technologies arguably helps in two ways:  the transitioning of “older” assets (SLB-linked) as well as the buildout of newer, low-carbon assets (UoP).

Fig. 1: Purpose of a combined framework – “Reach ESG goals”

  • Dual-purpose frameworks serve as a one-stop shop for a firm’s entire debt capital structure: While all companies in our sample cover bonds, 77% also reference loans, and 54% other private debt instruments – with some also including derivatives. Interestingly, when frameworks reference loans, or the Loan Market Association (LMA) principles, they also tend to have a broader scope, often including more than two key performance indicators (KPIs). This is a sensible approach, especially from a governance and economies of scale perspective. 

Fig. 2: Instruments covered in the frameworks

  • Considerable thought and preparation go into such frameworks: Looking at project categories, KPIs in the framework, as well as the number of pages dedicated to each of the Use of Proceeds and SLB characteristics, it becomes clear that considerable thought and resources go into developing these documents. The number of pages dedicated to each of the UoP characteristics and SLB characteristics is 6-7 pages, or 12-14 in total. On average, the frameworks target six project categories – aligned with the International Capital Market Association (ICMA) classification – and two KPIs.

Fig. 3: Frameworks’ average number of pages

  • Power and utilities make up the majority of the ‘dual-purpose framework pioneers’: Power and utility (P&U) companies have been notably the first to use these new frameworks. Not unsurprisingly: in both sectors we find frequent issuers and early adopters of ESG-labelled debt. Also, many integrated P&U firms have diverse types of assets, which means that they can finance their “Green business” and “Transition business” with different types of instruments.

Not compromising depth for breadth

In a future that is green and KPI-linked, a dual framework is the most straightforward setup for treasury teams to maintain. And, our research suggests the first such wave of frameworks has not compromised depth for breadth. 

We would like to thank Carl Romon for his excellent research assistance.

Source: NatWest, public disclosure

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