Reaching one’s sustainability goals is akin to the Chinese proverb of a 1,000-mile journey in that it “begins with a single step”. What seem to be daunting objectives need to be broken down into more manageable chunks. 

We have seen some corporates do just this through their sustainability-linked finance frameworks - most recently TDC (see ‘example’ at the bottom of this article). Rather than including just a handful of milestone years (typically 2025 and 2030), they stipulate targets for every calendar year, similar to the way sustainability-linked loans are structured. Is this “satnav approach” the way forward?

The approach has obvious benefits: It’s more transparent as it gives investors and other stakeholders a much clearer sense of how a company expects its sustainability journey to evolve as well as the single objectives that are relevant to the current management’s tenure (rather than more qualitative statements about the implementation plan). For treasurers, it also offers greater sustainability-linked product choice; both in terms of types of financial instruments (e.g. shorter-dated solutions like sustainability-linked CP or FX) as well as tenor of those instruments (e.g. selecting preferred bond maturity).

However, there are also drawbacks. A corporate’s sustainability journey is inherently uncertain and dependent on many factors outside of its control. In fact, one discussion the market is increasingly focused on is around appropriate wording in sustainability-linked bond (SLB) prospectuses to allow re-benchmarking in case of material changes in a company’s profile or operating environment. Setting annual targets in stone may therefore require more frequent updates of a framework, which would also likely result in having to reach out to investors more frequently – particularly if delays are occurring.

Furthermore, it’s also important to think about the development of those interim targets. Along with setting yearly targets based on specific projects and initiatives, issuers can also use a ‘linear’ approach. Such an approach leverages existing targets and historical performance to develop the average yearly change that, when applied, achieves the future milestone year(s) goal. However, while this process is straightforward and acceptable to the market, it may not accurately reflect the trajectory towards reaching a target. This tailored, project-based approach also comes with risks, as mentioned above, but can lead to interim goals that are more closely aligned to the issuer’s actual expected progress. 

Looking at the pros and cons, there are good reasons for treasurers to consider setting out their pathway in more detail. After all, sustainability journeys generally don’t involve leapfrogging but continuous steps in the right direction.

Example of setting interim targets for a Sustainability-Linked Bond framework

  • In the example below, TDC NET mapped out their expected CO2 reductions based on specific initiatives and then set their targets
  • Their framework includes projected Scope 1 & 2 and Scope 3 greenhouse gas (GHG) emissions reduction targets for every year until 2030 (net-zero target) 
  • TDC’s interim targets do not follow a typical linear approach but rather look at the specific sustainability initiatives and their expected impact 
  • While TDC does provide details on any specific initiative or plans in their framework, their other sustainability disclosures also provide some insights on how these reductions will be achieved. For example, TDC outlines in their ESG highlight report that they will enter into a renewable Purchase Power Agreement (PPA) in 2022 which will reduce their Scope 1 & 2 emissions from 2023 onwards (box highlighted in green below)

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