A sustainability-linked bond (SLB) issued in the UK this week has brought some innovation in the nascent space. UK property company Grosvenor Group issued a GBP1.1 billion SLB with no sustainability indicators. The banks involved agreed to allow Grosvenor to add them in the next twelve months. I haven’t seen the instrument or excerpts from it, but those who have are unsurprisingly critical of the situation. A few highlights from this cohort:
- While the company is making public statements that it intends to develop “ambitious KPIs,” the instrument language doesn’t compel any particular level of difficulty. The terms of the deal appear to be the same whether the KPIs that eventually are established are ambitious or weak.
- Competition in the banking environment in the EU is “hyper intense” at the moment, leading some lenders to be highly conciliatory. However, as one article states:
Lenders across Europe have insisted that ESG principles are too important to their institutions, too important to the market, or in the most extreme cases of self-righteousness, too important for the future of the world, for them to allow standards to slip. This deal undoes those claims.
On the other end of the spectrum, Brazilian-based meat packer JBS announced its own $1 billon SLB that includes specific meaningful commitments to “eliminate illegal Amazon deforestation from its supply chain by 2025, other Brazilian illegal deforestation by 2030, and to have zero deforestation across its global supply chain by 2035.” While JBS is not headquartered in Europe, at least two of its bankers in this deal are European-based.
Even more aggressive is the SLB issued by Italy-based major oil company Eni. This SLB includes two key performance indicators tied to the deal: increasing renewable energy capacity from 307 MW in 2020 to 5 GW in 2025, and reducing Scope 1 and 2 emissions by 50% by 2024 from a 2018 baseline.
It will be interesting to see how market practice develops here. The validity of the SLB market, claims and goals – actually the entire “green bond” market – relies on its credibility. A highly competitive market in any setting presents challenges to adhering to commitments, standards and even legal mandates. But if credible targets are absent from “green bond” deals, bankers and companies could face more skeptical creditors. That means the demand for these bonds likely would drop, selling the deals on favorable terms would be more challenging, and – worst case scenario – the market could evaporate.
What You Can Do
The temptation – and pressure – might be to take offered terms that are too good to be true, or maybe counterintuitive, and not look back. But doing so could end up having a hidden cost in the near term as well as contributing to an overall erosion in market confidence in these instruments – and that might cause more significant problems in the long run. If you are in the process of, or are considering, issuing SLBs or another green bond, it’s worth considering the long view – and the optics – of any deal. This is an example of the hard decisions that executives are faced with making in fully committing to corporate ESG, avoiding greenwash and backlash.
