What ESG investors want: Sustainability-Linked Bonds need fine tuning

13 October 2021

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

View bio

Niceasia Mc PerryCorporate Financing & Risk Solutions

View bio

Other insights

View more insights

The sustainability-linked bond (SLB) market has emerged as one of the fastest growing ESG asset class of 2021, already accounting for 10% of the overall market. 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.

Watch the full replay of this webinar to hear more about ESG investors’ views on SLBs.

To watch replays of the other webinars of this series, click on the links below:

  1. Sustainability strategies
  2. New sustainable debt structures
  3. SDG investing
  4. 2021 trends
  5. Transition Finance
  6. ESG Reporting and Disclosure
  7. Corporate Climate Change Action
ESG
ESG/Sustainability
Green Bonds


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 2021 © NatWest Markets Plc. All rights reserved.