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This recent article in Responsible Investor covers an interesting – and perhaps predictable – aspect of sustainability-linked bonds (SLBs).

“The failure of Greek state-owned utility Public Power Corporation (PPC) to hit emissions targets tied to its first [SLB] is unlikely to result in an additional financial impact, according to market participants. PPC raised 650 million Euro from its first SLB in March 2021, followed by a 125 million Euro tap in the same month. Investors were promised an extra 50 basis points on the coupon should it fail to cost scope 1 emissions by 40% by the end of 2022.”

The company missed the emissions reduction target by 4% because of increased coal use during the EU energy crisis, meaning the penalty was triggered. This will cost the company around 4 million Euros per year for three years until the bond matures in 2026 for a total of 12 million Euros. But that doesn’t seem to be bothering anyone. Fitch Ratings said the increased costs will have a “limited negative impact” even though ESG labeled funds own around 60% of the bonds. Moreover, PPC has another SLB (this one for 500 million Euros) tied to a 57% reduction in Scope 1 emissions and Fitch said they expect the same situation will happen with that bond too.

Even so, Fitch stated none of this is really important:

“we expect main funds to factor in their decision making that the failure to meet the target is unrelated to PPC’s operating performance, a change of strategy or a weakening of its sustainability focus.”

Others quoted in the Responsible Investor article mirror the sentiment that missing sustainability targets is no big deal and may even be an important element of a functioning market because “if investors expect the targets attached to SLBs, there will inevitably be cases where an issuer fails to hit them. A sell decision would be ‘highly contextual’, [Charles Smith of the European Bank for Reconstruction and Development] added, and would depend on the issuer’s wider commitment to the transition and its sustainability objectives.” Another investor justified things by saying:

“It may seem unfair that a company has to pay financial penalties due to policy changes outside its control… However, if the company is able to reassure the market that they remain committed to strong sustainable performance, we would expect they can avoid a widespread selloff.”

This has me wondering if SLBs really are fit-for-purpose or if they are simply another form of greenwashing. When SLBs first came out, I was excited about the carrot and stick approach and was optimistic of their success even knowing penalties were arguably nominal. Now it looks like investors can profit from sustainability failures, concurrently justifying why that is okay. This kind of thinking puts ESG/sustainability practitioners in a hard place because it puts zero financial value of their work when you really get down to it.

Reminds me of this from way back when.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile