Sustainability-Linked Bond Watch Note: Q1 2022

Key themes

  • The Sustainability-Linked Bond (“SLB”) market continued its evolution in Q1 2022 despite a small inflection of supply (5% down vs Q4 2021) due to the more volatile macro backdrop as the Russia-Ukraine war unfolded. Nevertheless, SLBs continue to represent a viable financing option in the Sustainable Capital Market with companies choosing this structure in more than 11% of times (NatWest, Bloomberg) over the quarter.

  • Noteworthy was the launch of the first SLB from a Sovereign state as the Republic of Chile printed USD 2 billion in March, paving the way for further expansion of this segment especially in the emerging markets. In the corporates (non-financials); Utilities and Consumer Staples had another solid quarter (accounting for 25% and 14% of the total SLB Market (NatWest, Bloomberg)) with notable transactions from Enel and Carrefour providing clear evidence that SLBs are a powerful tool, in particular – but not only – for high-emitting issuers such as Transportation, Oil & Gas, and Construction materials.

  • SLBs linked to science-based targets have surged in Q1 2022 and now account for more than 65% (vs 61% at the end of 2021) of all environmentally-focused structures as an increasing number of companies choose this type of commitment to prove the robustness of their climate transition strategy. However, as the market grows more sophisticated, the discussion around reliability of data on Scope 3 greenhouse gas emissions (GHG) and their appropriateness as a credible Key Performance Indicator (“KPI”) for sustainability-linked financing has left many scratching their heads. Some have decided to only include certain Scope 3 categories (e.g. suppliers’ GHG emissions) while others issued SLBs targeting a specific issue (e.g. plastic waste or food waste) in their value chain. 

  • As noted in previous publications, a “meaningful” financial incentive is a key component of an SLB. The market’s preferred mechanism for companies missing their sustainability targets remains a (25bps) coupon step-up, yet multi-coupon steps as well as redemption step-up structures have gained in popularity over the past quarter. Moreover, the data suggests that the cumulative financial incentive became more meaningful over time with the majority (72%) of structures embedding a 75bps or more total penalty in Q1 2022.

  • An active dialogue with the buy-side highlighted the increased sophistication in the assessment of a new issuance with many investors having a dedicated framework laying out the desired key features of an SLB. Moreover, one element that has gained substantial interest, borrowing from the loan market, is symmetric coupon step-up/down structures which would prove to be a valuable proposition for some market participants.

I. Supply Dynamics*

Supply amount issued EUR bn equivalent

Source: NatWest, Bloomberg

Split by Sector

Source: NatWest, Bloomberg

Split by Geography

Source: NatWest, Bloomberg

Split by Rating

Source: NatWest, Bloomberg

II. Structural features

KPI features

Main KPI categories

Source: NatWest, Bloomberg

KPI categories, % change vs Q4 2021

Source: NatWest, Bloomberg

III. Sustainability Performance Target (“SPT”) features

Split by Science-Based Targets initiative (“SBTi”) Commitment [1]

Source: NatWest, Bloomberg

Target year as a % of overall tenor

Source: NatWest, Bloomberg

IV. Economics

SPT driven adjustment to debt instrument

Source: NatWest, Bloomberg

Step-up as a % of at-issue credit spread [2]

Source: NatWest, Bloomberg

Total cumulative penalty split, Q1 2022

Source: NatWest, Bloomberg

Average cumulative penalty, historical

Source: NatWest, Bloomberg

[1] Representative of deals with at least 1 Environmental KPIs

[2] Coupon step-up adjustment (bps)/Issue spread to benchmark (mid-swap spread for EUR, Gilt spread for GBP and T spread for USD)

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