How are issuers of various ESG-labelled bonds (and none) different?

04 January 2022

Dr Arthur KrebbersHead of Corporate Climate and ESG Capital Markets

View bio

Niceasia Mc PerryCorporate Financing & Risk Solutions

View bio

Other insights

View more insights

There’s a lively debate around the wider benefits of issuing sustainability debt, and, indeed, whether those benefits are more for a green (or other ‘use of proceeds’) instrument or a sustainability-linked instrument.

With the European corporate market for both structures having grown rapidly over the past year, we have conducted some initial analysis on this topic. For this purpose, we have utilised the full range of Arabesque S-Ray ESG scores for listed issuers of green, sustainability-linked and conventional bonds. While the sample sizes and period are necessarily limited, our indicative analysis leads to two observations:

Green bonds versus sustainability-linked bonds? Issuers are not that different

As the table (Figure 1) highlights, there is (currently) no statistically significant intrinsic difference in the wider ESG profile of a green or sustainability-linked bond issuer. This suggests that the idea that a typical issuer of sustainability-linked bond (SLB) debt is possibly “less well transitioned” – as they focus their issuance on forward-looking ESG improvements – is not currently proven. Equally, it could make the sustainable finance market more dynamic in the future: today’s SLB issuers could become tomorrow’s green bond issuers and vice versa.

ESG-labelled bond does not necessarily make you an “ESG angel”

One swallow does not make summer, and one green or SLB issuance doesn’t make for a fully-rounded ESG profile. Our sample of sustainability debt issuers actually scores weaker, when compared to conventional bond issuers, on certain scores – most notably environmental management, waste, and occupational health and safety. Some would argue that this reflects a degree of “greenwashing” – certainly it highlights the importance of scrutinising a company’s entire ESG strategy. Equally, however, economies of scale mean that regular sustainable debt issuers tend to have larger, more internationally diversified, and more complex operations – which pose distinct ESG challenges.

We are the first to acknowledge the limitations of this analysis. The sample size is necessarily small and based on one point in time, not considering length of time since the first sustainable debt issuance. As the SLB market advances, subsequent analysis could deal with such limitations. However, it does suggest one should be careful with overarching claims about the merits of a specific ESG debt technology.

Many thanks to our intern Samuel Nejman for his excellent research assistance.

Figure 1: Cross-comparison of corporate issuer types and firm ESG metrics

Metric
(averages)

Green bond issuer

SLB
issuer

Conventional
bond issuer

Difference
(GB-SLB)

Difference
(GB-Conv)

Difference
(SLB-Conv)

GC Score – Environment

63.2

64.0

65.9

-0.8

-2.7*

-1.9

Business Ethics

47.7

40.1

49.7

7.6

-2.0

-9.6*

Environmental Management

60.1

58.2

69.8

1.9

-9.7**

-11.6*

Waste

59.5

62.0

67.6

-2.5

-8.1*

-5.6*

Forensic Accounting

56.4

58.7

42.6

-2.3

13.8

16.1*

Diversity

63.7

64.8

59.7

-1.2

4.0

5.1*

Occupational Health & Safety

59.0

53.8

63.2

5.3

-4.2*

-9.5**

Training & Development

73.8

68.8

70.4

5.0

3.4*

-1.6

Resource Use

64.6

68.8

70.3

-4.3

-5.7*

-1.4

Environmental Solutions

65.8

66.1

57.5

-0.3

8.3*

8.6

Based on a Western European sample of 38 companies: 13 GB issuers; 13 SLB issuers; 12 conventional bond issuers.
Differences (last three columns) are the subtraction of the averages of metrics of the mentioned types of bonds.
Averages are in score from 0-100 (higher is better).
The meaning of the metrics are as follows:
t-tests have been conducted on all the data above. One-tailed for sustainable debt issuers vis-à-vis conventional debt issuers based on the hypothesis that this first group scores better; two-tailed for green bond versus SLB bond issuers due to the hypothesis that such issuers score similarly.
Date of observations: 01/10/2021
*p-value ≤ .10
**p-value ≤ .01

Definitions

GC Score – Environment

Environment sub-score (part of UNGC total score)

Business Ethics

Fair business practices as they relate to issues like corruption, political contributions and anti-trust

Environmental Management

Mechanisms and policies to manage overall environmental performance of the business

Waste

Generation of waste and other hazardous output as part of business activities

Forensic Accounting

Overall earnings quality or the degree to which reported earnings properly represent a firm’s financial health

Diversity

Representation of, and equal opportunity for, women and minorities in the workforce and on the board

Occupational Health & Safety

Workplace-replated health and safety performance

Training & Development

Opportunities and programmes to enable and support learning across employees and the supply chain

Resource Use

Efficient use of energy and other natural resources (incl land and materials)

Environmental Solutions

Environmental impact of products and services, and contribution towards sustainable consumerism

Sources: NatWest, Arabesque S-Ray, Bloomberg

ESG


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2022 © NatWest Markets Plc. All rights reserved.