Sustainability-linked bonds in ‘rapid growth’ in 2021

Sustainability-linked bonds in ‘rapid growth’ as more firms tap ESG debt market:

As companies across a wide range of sectors seek access to the environmental, social, and managerial debt markets, analysts expect the issuance of an emerging type of mortgage to accelerate, linking coupon to debt sustainability.

For TotalEnergies SE, the so-called sustainable tire has become the new standard. The French oil and gas company, formerly known as Total, announced in February that all of its new bond issues would be linked to key climate performance indicators or KPIs.

This means that the coupon that TotalEnergies pays investors depends on their performance against measurable targets, such as emissions 1 and 2, that is, all direct and indirect emissions under the company’s control. As CEO Patrick Pouyanné said at an earnings conference: If we don’t reach our goal, we will be punished with an increase in debt, and [mortgage holders] will be rewarded.

Unlike traditional green and social impacts, a sustainability bond has no restrictions on resource use. This flexibility allows a wider universe of issuers to obtain sustainable financing, such as those that may not have sufficient capital or green capital expenditures to spend a sustainable asset, or that do not have the ability to monitor or report. necessary for such tools, said Lori Shapiro, co-founder of S&P Global Ratings’ sustainable finance team.

Sustainable bond issuers are committed to improving their performance against adjusted ESG targets and directly linking this commitment to the coupon paid to investors. In September 2019, Italian energy group Enel SpA issued a single five-year bond worth $1.5 billion with an annual coupon of 2.65% if the company hits the 55% target. Renewable energy capacity will be installed in 2021. The coupon is increased by 25 basis points until the bond matures.

CPI Green Taxonomy

As investors become more and more familiar with sustainability-related bonds, there is still skepticism, particularly in relation to the so-called coupon increase, which fines the issuer if it fails to meet its target.

The accumulation coupon is still something that is not widely accepted by investors because if the company doesn’t achieve its goals, you have a monetary advantage as an investor. And they say you’re not a responsible investor that way, said Dax.

According to S&P Global Ratings, innovation in pricing structures can help overcome these barriers, as bondholders want to avoid potential reputational damage through the benefit of pricing adjustments when approving ESG projects.

Investors also expressed concern about discrepancies in labeling, the possibility of greenwashing, and a lack of ambition in issuing bond issuance targets. US asset manager Nuveen warned in a recent memo that the credibility and reliability of these trades are highly volatile, citing several recent actions where KPIs have been reproduced to achieve this with relative ease and called for targets and frameworks reports were more scientific. an aspirant.

While the principles for sustainability reporting published by the International Capital Market Association in June 2020 help promote market discipline, the introduction of new reporting frameworks such as the EU Green Taxonomy will further accelerate the standardization of tools, he said. he.

The taxonomy, which will come into effect in 2022, defines the criteria for qualifying a project or financial product as green. The European Commission published the first version of this regulation in April, which covers sectors such as energy, forestry, manufacturing, transport, and construction.

Using the taxonomy as a benchmark for KPIs in a sustainability bond, a real estate company or mortgage lender can drive the proportion of buildings that fit the taxonomy in their portfolio, while a utility company can. and a bank for its green assets index said, Dax.

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