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Sustainability

The fundamentals of SLBs remain robust in Q3

Dr. Arthur Krebbers and Pietro Stimamiglio reflect on the biggest themes and events shaping the Sustainability-Linked Bond market from Q3.

Key themes

  • Overall supply was 41% lower than Q2, albeit in line with Q3 2021 (EUR 28.3 billion year-to-date (YTD) Q3 2022 vs EUR 29.0 billion YTD Q3 2021), which suggests that the fundamentals remain robust.
  • In terms of metrics selected, carbon / greenhouse gas (GHG) emissions remain unrivalled as the most popular choice, given the relatively well-understood modelling assumptions required to assess the ambitiousness of SLB targets. However, since Q2 the number of bonds with multiple key performance indicators (KPIs) (2 or 3) exceeded those linked to only 1 metric. This is something that has continued in Q3 2022, suggesting a convergence towards what has been observed in the loan market i.e. multiple KPIs are the norm rather than the exception. 
  • A possible driver of the increase in multiple KPIs has been the publication of the Illustrative KPIs Registry by the International Capital Market Association (ICMA) in June 2022, which introduced the concept of “core” and “secondary” KPIs. Since the publication, the majority (78%) of SLBs have adopted metrics covered in the registry. On that note, it is worth clarifying that the examples provided are illustrative only and are not intended to be the exclusive approach for KPIs selection in SLBs.
  • As mentioned in previous notes, the methodology provided by the Science Based Target initiative (“SBTi”) has de facto become the go to for companies aspiring to set targets to reduce emissions in line with the Paris Agreement goals. This is evidenced by the stable number of SLB issuers that obtained this type of verification, stable at ca. 64% for the whole market. Furthermore, the publication of new guidance for the cement sector in September is expected to provide additional clarity for SLB issuers in the sector, especially around emission intensity metrics.
  • Biodiversity and financial products linked to this theme has generated interesting debates among market participants, especially in the sovereign SLB space. Notably, the non-profit foundation Finance For Biodiversity launched the Sustainability-linked Sovereign Debt Hub (“SSDH”) to provide technical support and outreach to encourage governments to embrace the structure.
  • While some issuers have already announced their intention to issue only SLBs going forward, others are considering “greenifying” their capital stack by converting their existing conventional bonds into SLBs via consent solicitation. The process is more formalised at the margin, compared to a conventional-to-green exercise, given the need to make some material changes to the term and conditions of the instrument. However, it is often cited by issuers as an opportunity to engage with their investors specifically on their ESG or sustainability strategy.

I. Market Dynamics (Q3 2022)

Split by sector

Source: NatWest, Bloomberg

Split by country

Source: NatWest, Bloomberg

Split by Rating

Source: NatWest, Bloomberg

Split by inaugural / repeat issuance

Source: NatWest, Bloomberg

Split by number of KPIs

Source: NatWest, Bloomberg

Split by penalty

Source: NatWest, Bloomberg

KPI category (change Vs Q2 2022)

Source: NatWest, Bloomberg

II. Market Dynamics (since market conception)

Issuers

Split by sector

Source: NatWest, Bloomberg

Split by country

Source: NatWest, Bloomberg

Split by rating

Source: NatWest, Bloomberg

Split by inaugural / repeat issuance

Source: NatWest, Bloomberg

Structural Dynamics

Split by number of KPIs

Source: NatWest, Bloomberg

Split by penalty

Source: NatWest, Bloomberg

KPI category (change Vs Q2 2022)

Source: NatWest, Bloomberg

Split by SBTi commitment [1]

Source: NatWest, Bloomberg

ICMA KPI registry core vs. secondary KPIs [2]

Source: NatWest, Bloomberg

Demand

Average oversubscription EUR

Source: NatWest, Bloomberg

Average oversubscription USD

Source: NatWest, Bloomberg

[1] Representative of deals with at least 1 Environmental KPIs

[2] Analysis based on sustainability-linked bonds issued since 20th June 2022

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.

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