Green sustainability-linked bonds and other combined format examples
In March 2021, Japanese construction company Takamatsu issued the first sustainability-linked green bond (“SLGB”), using bond proceeds to fund the construction of a new energy-efficient building in Tokyo, while being tied to the achievement of a revenue contribution to all of the 17 UN Sustainable Development Goals. The SLGB not only supports green real-estate development but also ensures (at least to a certain extent) a holistic alignment of the company’s overarching strategy to sustainable development. Europe’s first issuance of a SLGB followed quickly, through Austrian utility company Verbund, whose issuance is tied to the expansion of both the Austrian power grid and a specific hydro-power plant. In addition, the company committed to meeting two sustainability performance targets related to integrating renewable energy generation into the grid. Other examples of the SLGB format include Japanese real estate investment trust GLP J-REIT and German automotive parts supplier Mann+Hummel.
Another approach to strengthening one of the “classic” formats is to include capital expenditure KPIs as part of an SLB. In February this year, Italian energy-infrastructure company Enel (who launched the world’s first sustainability-linked bond back in 2019), issued an updated SLB, which included targets to reduce scope 1 greenhouse gas emissions intensity and to invest at least 80% of its capital expenditure in EU Taxonomy-aligned projects between 2023-2025. Despite not including defined use-of-proceeds categories, thus remaining unrestricted in terms of volume, the bond ensures funds are channeled towards recognized green projects, thereby incorporating a level of transparency not always present in SLBs.
Other European issuers, such as the aluminium producer Norsk Hydro, the packaging company Bewi and telecommunications giant Tele 2, have published sustainable finance frameworks including both green use-of-proceeds and sustainability-linked KPIs, but so far none have combined the two formats in their issuances. Taking the first step by including and defining both UoP and KPIs might however indicate a recognition that the market will look more kindly on issuers acknowledging both the direct impacts of their investments as well as their overall goals and strategy to reach these.
Ensuring real-world and long-term change
The combined formats allow for real-world and longer-term embedding of changes. By incorporating the forward-looking metrics from a KPI-structure to a defined use-of-proceeds structure, the formats bring the management and oversight into what could cynically be labelled an accounting exercise (UoP). On the other hand, the addition of clearly defined sustainable investments, either through delimited use-of-proceeds categories, or through targeted capex KPIs, ensures short-term sustainability from structures characterized by long-term targets with uncertain impact.
Ultimately, such structures mitigate identified issues and could supply the holistic approach investors want (and the world needs): accountability for where money is being spent AND for the decision making around the organisation that is spending the money. It hits both the what (UoP) and the how/why (SLB) of an organisation.
Sustainability is a topic that has grown somewhat unchecked over the past decades, making its way into companies’ strategies, communication, reporting and financing. Previously mere mention of sustainable intent was sufficient to garner acceptance and support. Now we are moving into a world where expectations are both increasing and tightening.
In the sustainability-reporting sphere, investors and society now expect to see credible transition plans, scenario planning and ambitious yet achievable pathways in place. The bond markets are also becoming more sophisticated in their evaluation of sustainability. Simple allocation of proceeds may soon no longer be enough. Investors will also require evidence that the overall organisation is moving in the right direction and is held to account for meeting appropriate sustainability-related milestones. GSLBs and other mixed formats can provide the assurance needed by mitigating the weaknesses of the single formats.