In order to standardize the set-up of this instrument, ICMA also developed voluntary process guidelines for corporates considering a SLB issuance. These principles consist of five core components:
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- The selection of KPI’s that are deemed relevant core and material for the issuer. Moreover, the KPI should be measurable and preferable externally verifiable. An example can be found in H&M’s SLB framework that, among other KPI’s, has identified the share of recycled materials over the total materials used in its commercial goods as a material KPI for its industry.
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- The definition of the sustainability performance targets for the selected KPI’s should be ambitious, i.e. it does not make sense for a company to set the bar low on its sustainable commitments. In order to gauge the ambition level of these targets, they should be compared to a benchmark or peers, go beyond the business as usual trajectory and preferably have a reference to science based scenario’s or international targets, such as the Paris Agreement on Climate Change. Enel uses its greenhouse gas emissions reduction target in its framework, which has been assessed by the SBTi to be aligned with the 1.5°C pathway trajectory.
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- The way the financial or structural characteristics of the bond will change depending on reaching the predetermined targets. As an example, Klabin, a Brazilian paper company, has defined a 12.5 bps coupon step-up if a KPI (water consumption intensity) does not meet its stated target by 2025.
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- The way the issuer will report on its advancements on the relevant KPI’s and ensure full transparency with investors.
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- How the verification of the targets for each KPI takes place at the predetermined timeslots.
The selection of relevant KPI’s and targets might be easier for companies exposed to climate-related themes, such as decarbonisation, where clear-cut processes and targets have been defined to calculate the scope 1, 2 and 3 emissions. For companies facing more social material ESG issues, this set-up of relevant KPI’s and targets might prove more challenging, but not insurmountable.
Given the additional flexibility of these types of instruments and the uncertainty investors face on the proceeds of the bond, investors must thoroughly analyse every issuance in order to prevent sustainability-washing.
SURGE IN SOCIAL BONDS AS FROM 2020
A last type of labelled bond to discuss is the social bond. This activity-based debt instrument has a focus on projects with a social impact when it comes to its use of proceeds. Besides this different scope, it can best be compared to the mechanism of green bonds. The surge of this type of instrument, which tripled issuances in 2020 compared to the year prior to a staggering amount of $150 billion, can be associated with the Covid-19 pandemic.
Many players, mainly government agencies, sovereign bodies, and supranational entities use this financing instrument to counterbalance the negative social consequences caused by the Covid-19 pandemic. The proceeds of these bonds are consequently allocated projects to alleviate unemployment figures, increase the access to social housing or expand the access to health services.
Social bond issuances are also flourishing in 2021, with the current issuances nearly matching last year’s figure already! We are confident that this trend will continue to persist and hope that the issuance by corporates (which only represent 17% of market issuances in 2021) will gain traction.
NEED FOR QUALITATIVE ASSESSMENTS
Thanks to the environmental focus of Biden’s infrastructure plan, the rollout of environmental initiatives from the European Union and the proliferation of net-zero emissions goals announced by governments and companies around the world, sustainable bonds issuances will only go up. There will be an increased level of quality assurance thanks to upcoming regulations, such as the recently published green bond standards by the European Commission. On the other hand, asset managers will have an additional level of scrutiny by investors to demonstrate a thorough understanding of the sustainability challenges of issuers when investing in sustainability-linked bonds.
