Is SLB ambitiousness rewarded?

One of the central debates around the Sustainability-Linked Bond (SLB) asset class is the perceived ambitiousness of the target an issuer commits to.

19 Oct 2022 . 3 min read

Amidst an obvious information asymmetry between issuers and investors, the latter at times feel they are paying for a structure with no real “bite”. Is this starting to impact asset prices? Our initial research suggests that SLBs with at least one environmental target do indeed typically trade at tighter spreads.

Judging whether “more” ambitious SLBs outperform is no straightforward task. Key Performance Indicators (KPIs) and their methodologies are still very heterogeneous, and the sample size of this rather young market is limited. For this initial research exercise, we have defined ambitiousness as whether the SLB includes at least one Science-Based Targets initiative (SBTi) approved target, looking at a sample of Euro-denominated bonds.

Each SLB was paired with a similar conventional bond from the same issuer (i.e. controlling for currency, benchmark size and selecting a similar tenor). Using this approach, we were able to pair seven SLBs that incorporate at least one ambitious target (i.e. approved by the SBTi) and seven that do not include any ambitious targets.

Our initial finding has been that SLBs with an SBTi target typically trade better (i.e. tighter) compared to those that do not include at least one SBTi target. The average spread difference for the sub-sample with at least one ambitious target is +17.0 basis points compared to +21.4 basis points difference for SLBs with no SBTi targets. Notably, for the last couple of months this spread difference tends to persist – suggesting, potentially, greater scrutiny of the robustness of SLBs, particularly in more volatile market environments.

As the SLB market matures, it should get easier to differentiate ambitious and not ambitious targets – beyond just looking at SBTi alignment. This should be encouraged. It should help reward issuers who are putting their money where their mouth is and setting (more) ambitious goals.

Methodology and definitions:

Guidance provided by the International Capital Market Association (ICMA) with the Sustainability-Linked Bond Principles (“SLBP”) states that targets should systematically reference science-based scenarios (e.g. SBTi), absolute levels (e.g. carbon budgets), or official country/regional/international targets (e.g. Paris Agreement on Climate Change and net-zero goals). Therefore, an ‘ambitious’ target is defined as using the Science-Based Target initiative “SBTi” approach with specific annual reduction targets (e.g. 4.2% linear reduction per annum for Scope 1 and 2) to be aligned with limiting warming to 1.5°C. This research did not make a distinction between Scope 1 and 2 emissions and Scope 3 emission targets approved by the SBTi nor make any maturity adjustments.

We reviewed Euro currency, investment grade (as rated by the Bloomberg consolidated credit rating) sustainability-linked bonds issued to identify those that had at least one ‘ambitious’ target (as defined above). Of the 23 bonds with ambitious targets, we then looked to see if each issuer had a conventional issuance that was similar in terms of size (average difference +/- 85mln), issuance date (average difference +/- 1 year), and coupon (average difference +/- 66 bps).

Total population of SLBs: 62*

Total number of those with at least one ambitious target: 23*

Total number of SLBs with at least one ambitious target with a suitable conventional: 7

Total number of SLBs without at least one ambitious target with a suitable conventional: 7

*This includes multiple SLBs from the same issuer (e.g. Enel)

Thank you to our intern Tom Hereijgers for conducting the underlying analysis.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Is SLB ambitiousness rewarded?

Methodology and definitions:

Related articles