Sustainability-Linked Bond Watch Note: Q3 2021

08 October 2021

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Pietro StimamiglioCorporate Financing & Risk Solutions, Sustainable Finance

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I. Key themes

  • Sustainability-Linked Bonds (SLBs) continue to be a hot asset class in the Sustainable Debt Capital Market, and it is slowly becoming more sophisticated with issuances (ytd) almost 7 times higher compared to 2020 levels. The summer slowdown did not impact the issuance of SLBs significantly which still accounted for 0.5% of the total market in Q3 (same as in Q2), albeit with a small inflection in absolute terms (2021 Q3: EUR ~19bn vs 2021 Q2: EUR ~22bn).
  • Notably there were no companies from new sectors tapping the SLB market in Q3; however, a number of issuers, Utilities and Forestry and Paper companies in particular, are now fully endorsing this technology as a “tried and tested” funding strategy rather than a one-off exercise (33% of the total outstanding amount was from repeat issuers).
  • Nevertheless, the push for innovation is palpable and companies were not shy in establishing combined use of proceeds and sustainability-linked finance frameworks (e.g. Valeo and Vodafone) or including additional social Key Performance Indicators (KPIs) in their structures. Quite distinctive was the case of Philip Morris International, with its Business Transformation-Linked Financing Framework, that links the company’s financing strategy to its “smoke-free transformation”. See our ‘Is the SLB market ready for a social makeover?’ article for more on this.
  • Despite the openness to experiment with innovative features, SLBs remain deeply entrenched in more benchmarkable and scientifically verifiable environmental KPIs and targets. In Q3 the vast majority of issuers included at least 1 environmental KPI with carbon/greenhouse gas (GHG) emissions remaining the go-to choice. In this context it is interesting to note that a record of 172 companies set, or committed to setting, a science-based target in September 2021, as an effective way to highlight their sustainability target credentials. Thus, potentially loading the SLB pipeline for the coming quarters.
  • As in Q2, the question of what constitutes an adequate financial incentive for the company to achieve its targets is an open debate, with questions around penalty both in absolute terms and relative to the company’s all-in spread. To that extent, investors continue to build their in-house capabilities to be able to value sector and issuer specific nuances fairly.
  • A coupon step-up of 25 bps remains the most adopted financial structure to date, yet multi coupon step-ups and redemption premiums can be valid alternatives to accommodate for the specific instrument tenor. Coupon step-downs, which are popular in the Sustainability-Linked Loan market, are still in their infancy in the public bond market and with credit spreads near record lows their viability remains in question despite some precedents in Q3 e.g. Thai Union. See our ‘Issue Your Greens: Step-downs: a step too far?’ article for more on this.

II. Supply Dynamics* 

Supply amount issued EUR bn equivalent

Source: NatWest Markets

Split by Sector

Source: NatWest Markets

Split by Geography

Source: NatWest Markets

Split by Rating

Source: NatWest Markets

III. Structural features*

Main KPI categories

Source: NatWest Markets

% of emission targets that are Science Based Targets initiative linked

Source: NatWest Markets

Sustainability Performance Target driven adjustment to debt instrument

Source: NatWest Markets

Total cost in bps if target is not met

Source: NatWest Markets

Margin adjustment as a % of at-issue credit spread

Source: NatWest Markets

Target year as a % of overall tenor

Source: NatWest Markets

*Note: Analysis based on Sustainability-Linked Bonds issued in USD, EUR, GBP since 2019


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