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Sustainability

Ambitiousness of the SLB structure remains in focus

Our specialists reflect on the themes and events shaping the Sustainability-Linked Bond (SLB) market from Q4 2023

Key themes

  • Sustainability-Linked Bonds (SLBs) appeal to well-recognised issuers: A few well-known names still tapped the market for their funding needs in Q4 2023. For example, French supermarket company Carrefour printed their second (€750 million) SLB of 2023 and fourth overall, while Heidelberg Materials returned to market with a €750 million SLB as the cement company continued to finance its decarbonisation and net-zero targets. Danish manufacturer of wind turbines Vestas also issued its second (€500m million) SLB highlighting the instrument’s suitability across multiple sectors, including those that have typically opted for green use of proceeds.
  • Continued scrutiny of the product: Challenges on ‘ambitiousness’ of the structure remain a constant in feedback from investors who, despite this, remain supportive of the fundamentals of the SLB market. This should encourage more issuers into the market and with the growing number of companies setting new targets e.g. Science Based Targets initiative (SBTi) commitments, provide a degree of confidence that more will consider linking their financing to their sustainability objectives in the foreseeable future. In addition, more market guidance is pending this year: The International Capital Market Association (ICMA) SLB working group is developing a pre and post issuance checklist, and the Financial Markets Standards Board (FMSB) ESG working group is writing a paper with guidance for the sustainability-linked market more broadly.
  • Step-up triggers for first vintage: Upcoming SLB step-up events are currently in focus, with market researchers continuing to publish pieces with “outside in” views on the likelihood of targets being achieved. However, no material trading activity has been seen on the back of this, thus far. Of note, we‘ve published articles in the past that discuss the importance of the context, with regards to the target that has been set.
  • EU guidance in 2024: By 31 December 2024, the EU Commission is expected to publish guidelines that establish a voluntary template for pre-issuance and post-issuance disclosures, for issuers of bonds marketed as environmentally sustainable; including SLBs. These templates will offer issuers a standardised form to provide relevant information on themselves and the structure of the bond, thereby making the analysis of SLBs easier. In addition, the ‘offering material’ is also evolving, driven by independent initiatives from issuers. For example, Fiskars, who launched their inaugural SLB, published an ESG questionnaire besides their framework and Second Party Opinion (SPO) documents.

I. Market Dynamics (Q4 2023)

Split by sector

Source: NatWest, Bloomberg

Split by country

Source: NatWest, Bloomberg

Split by rating

Source: NatWest, Bloomberg

Split by inagrual SLB /  repeat SLB

Source: NatWest, Bloomberg

Split by number of KPIs

Source: NatWest, Bloomberg

Split by penalty

Source: NatWest, Bloomberg

KPI category (Q4 23 change vs Q3 23)

Source: NatWest, Bloomberg

II. Market Dynamics (since market conception)

Maturity year vs target observation date

Source: NatWest, Bloomberg. SPT: Sustainability Performance Targets.

Supply split by KPI type

Source: NatWest, Bloomberg

III. Structural Features

Main KPI Categories

Source: NatWest, Bloomberg

International Capital Market Association (ICMA) KPI registry core vs. secondary KPIs

Source: NatWest, Bloomberg. Analysis based on sustainability-linked bonds issued as of 20 June 2022 until 31 December 2023.

Emission KPI split by SBTi commitment

Source: NatWest, Bloomberg

Emission KPI split by scope

Source: NatWest, Bloomberg

IV. Primary Market execution dynamics

EUR oversubscription Q4 2023

Source: NatWest, Bloomberg

USD oversubscription Q4 2023

Source: NatWest, Bloomberg

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