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Sustainability

SLB landscape continues to exhibit innovation

Dr. Arthur Krebbers, Pietro Stimamiglio and Tyler Mayzes reflect on the biggest themes and events shaping the Sustainability-Linked Bond market from Q2 2023.

Key themes

Supply of Sustainability-Linked Bond (SLB) was subdued in Q2 2023 with volumes capped at EUR ~11 billion vs EUR ~21 billion in the previous quarter. The inflection was visible on an absolute basis but also relative to the total Green, Social, Sustainability, Sustainability (GSS/S) market of which SLB accounted to ~6% in the last quarter. However, this figure is still up from the ~5% at the lowest point.

 

Despite reduced issuance volumes, the corporate landscape continued to exhibit innovation, as evidenced by the introduction of new frameworks. Orange published its inaugural Sustainability-Linked Financing Framework having previously issued sustainability bonds (use of proceeds) and having signed a sustainability-linked €6bn syndicated credit facility. According to the company, the introduction of a Sustainability-Linked Financing Framework was an additional step emphasising Orange’s new enterprise model guided by social and environmental responsibility.  

 

Additionally, ACCIONA and ACCIONA Energía published a new Sustainable Impact Financing Framework (NatWest was sole ESG structuring advisor) applicable to both debt issues and bank loans. The framework includes both green projects for use of proceeds transactions, and KPIs (Key Performance Indicators) and targets for sustainability-linked structures, as well as a payout structure whereby the company commits to direct an equivalent amount to the yield saving from issuing in ESG-labelled format or the coupon step-down to support local initiatives which promote environmental or social co-benefits.  

 

• In terms of KPIs selection, a notable development emerged by the close of Q2 2023: 26% of all SLBs with environmental KPIs incorporated some types of Scope 3 emissions. Deutsche Post, in its inaugural SLB issuance, opted for an absolute Scopes 1 and 2 target as well as an absolute Scope 3 target which included emissions from fuel- and energy-related activities, upstream transportation and distribution and business travel.

 

• Carrefour was one of the companies that returned to the SLB market in Q2 2023 - 73% of all SLB were from repeat issuer during the quarter. The structure included both direct and indirect emissions KPIs including a partial Scope 3 target to reduce emissions from goods and services purchased. 

 

• The European Leveraged Finance Association (ELFA) and the International Capital Market Association (ICMA) have published a set of recommendations for the high yield bond market in the latest publication Practical Recommendations for High Yield Sustainability-Linked Bonds. The guide outlines 10 recommendations addressing specific characteristics of high yield bonds such as redemption provisions, covenant provisions, generally shorter tenor and higher representation of private companies, which has implications for disclosure and reporting.

I. Market Dynamics (Q2 2023)

Split by sector

Source: NatWest, Bloomberg

Split by country

Source: NatWest, Bloomberg

Split by rating

Source: NatWest, Bloomberg

Split by inaugural SLB / repeat SLB

Source: NatWest, Bloomberg

Split by number of KPIs

Source: NatWest, Bloomberg

Symmetric coupon step up / down

Source: NatWest, Bloomberg

KPI category (Q2 23 change vs Q1 23)

Source: NatWest, Bloomberg

II. Market Dynamics (since market conception)

Issuers

Split by sector

Source: NatWest, Bloomberg

Split by country

Source: NatWest, Bloomberg

Split by rating

Source: NatWest, Bloomberg

Split by inaugural SLB / repeat SLB

Source: NatWest, Bloomberg

Structural Dynamics

Split by number of KPIs

Source: NatWest, Bloomberg

Symmetric coupon step up / down

Source: NatWest, Bloomberg

Main KPI Categories

Source: NatWest, Bloomberg

ICMA KPI registry core vs secondary KPIs [1]

Source: NatWest, Bloomberg

Split by SBTi commitment

Source: NatWest, Bloomberg

Split by emission KPI scope [2]

Source: NatWest, Bloomberg

% of observed KPIs that have already been achieved before target date [3]

Source: NatWest, Bloomberg

Target Distribution

Source: NatWest, Bloomberg

1.Analysis based on sustainability-linked bonds issued as of 20 June 2022 until 30 June 2023

2.Targets that include an environmental component of scope 1, 2, 3, not necessarily all targets

3.Based on 140 individual KPIs tracked by NatWest

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