Yet the fierce debate around the structure continues – a reason for NatWest’s Sustainable Finance team to host an online panel about SLBs as part of NatWest’s “What ESG investors want” series.
“Be ambitious; deliver beyond expectations” was a clear message from the ESG investors on the panel – Barbara Calvi from Morgan Stanley Investment Management, Bernhard Grünäugl from BayernInvest and Bram Bos from NNIP.
Arguing that the targets/key performance indicators (KPIs) of sustainability-linked bonds need to go beyond achievements that would generally be expected, the panellists pointed out that gradually cutting carbon emissions (in particular Scope 1 and 2 emissions), for example, or aiming for increased board diversity (already enforced by regulators) are not sufficiently ambitious targets. Instead the panel – moderated by Dr Arthur Krebbers, Head of Sustainable Finance Corporates at NatWest Markets, and Niceasia Mc Perry, Sustainable Finance Corporates at NatWest Markets – urged SLB issuers to perform a deep dive of their material issues in order to identify relevant, far-reaching targets for their business – e.g. waste or water management, biodiversity or Scope 3 emission reduction targets – that clearly demonstrate that they are sustainably moving into the right direction of their transition.
Discussing the ideal structure of KPIs for SLBs, there was consensus about the requirement of a higher step-up in the coupon if there is a shorter period between the trigger event and the actual maturity of the SLB, while overall the panellists voiced their preference for the KPIs of the SLB to be delivered at different stages rather than only towards the end of the bond maturity. The panel also agreed that the 25bps coupon-step up, currently seen in the market, is proportionate because many SLB issuer targets are considered by the panel to be relatively unambitious. However, pricing differentiation is set to widen as more issuers enter the market, and both investors and issuers become more familiar with SLB frameworks.
Other key take-aways included:
SLBs are still in their infancy stage: SLBs are very much welcomed in the sustainability-labelled debt market, however, the market is still in the infancy stage, and issuers and investors are still on a steep learning curve as the market grows.
Issuer profile determines investor interest: whether issuers decide to issue an SLB or a Green (‘use of proceeds’) bond, the overall profile of the issuer remains extremely important. This counts for both the business activities of the issuer but also the overall targets the company has set.
SPO providers should not be omitted: contrary to views from some market participants, investors do rely on second party opinions (SPOs), hence proactively engage with SPO providers to receive granular reviews of new issuances.
SLB format suits issuers with less CapEx: green bonds (‘use of proceeds’) do not work for every issuer; there are some sectors where issuers don’t have a lot of capital expenditure, and for these types of issuers an SLB format works much better.
SLBs lend themselves to social and governance targets: while the majority of SLBs so far have solely included environmental targets, investors do welcome issuers “being more creative” and linking their SLB to social and governance targets. SLBs can better cater for those targets while they are more difficult to capture in Use of Proceeds bonds.
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