SLB supply has regained momentum

Dr. Arthur Krebbers, Pietro Stimamiglio and Tyler Mayzes reflect on the themes and events shaping the Sustainability-Linked Bond (SLB) market from Q1 2023.

26 May 2023 . 4 min read

While criticisms around the credibility of some structures remain, the overall tone on SLBs has become more constructive in the first few months of 2023.

Key themes

Supply of SLBs has regained momentum reaching EUR 19.2 billion at the end of Q1 2023. A notable resurgence, compared to Q3 2022 when supply dropped to its lowest point (EUR 6.9 billion). The ‘risk-on’ tone, on the back of more stable market conditions, has benefitted the SLB market, which is generally structured with longer tenors. As a result, SLBs have stabilised at around 11% of the total green, social, sustainability and sustainability-linked (GSS/S) market in EUR, GBP and USD, up from ~5% at the lowest point.
While criticisms around the credibility of some structures remain, the overall tone on SLBs has become more constructive in the first quarter of 2023 as issuers and investors expand their knowledge of the product and at the same time more research and certifications are released. For example, the Climate Bonds Initiative (CBI) has recently launched a certification scheme for SLBs and ‘company-level transition plans’ that could further verify the ambitiousness of some structures.
An increasing number of companies are considering the inclusion of Scope 3 in their sustainability-linked financing frameworks, covering at least some types of the indirect emissions across the company’s value chain. As of the end of Q1 2023, 26% of all SLBs, with environmental key performance indicators (KPIs), included some form of Scope 3. However, it’s important to recognise that the ability of a company to influence upstream and downstream emissions varies significantly. The lack of consistent methodologies, combined with the reliance on industry averages, makes the inclusion of Scope 3 KPIs an intrinsically non-binary decision.
Explicit disclosure on the use of carbon credits in SLBs is on the rise. 21% of bonds issued in Q1 2023 included some reference to the extent to which carbon credits can (or cannot) be used in the achievement of a sustainability target. Carbon credits purchased on the voluntary carbon market (e.g. Carbonplace) can help compensate a company’s residual emissions on the journey to net-zero. However, issuers are encouraged to be transparent on their reliance, also noting the Science Based Targets initiative (SBTi) 10% offset limitation.
Tracking of SLB performance remains central to issuers, as they go through their reporting cycles. Some investors have argued that a miss on an SLB target may constitute a “thematic default” for them, in which the securities are either no longer attractive, or contractually no longer eligible for certain sustainability investment criteria. As a result, this may lead to dispositions from climate-focused funds, with a potential negative impact on the price of the SLBs. However, initial feedback gathered by us, from a range of issuers, highlighted that non-compliance with a KPI does not necessarily mean a ‘forced sell’ and missing a target is not necessarily a negative: see our previous article for more on this. It was also suggested that failure to meet a sustainability target is more of an opportunity to question the issuer on the reasons behind the sustainability sub-performance and to understand what steps they would take to rectify.

I. Market Dynamics (Q1 2023)

Source: NatWest, Bloomberg

Split by country

Source: NatWest, Bloomberg

Split by rating

Source: NatWest, Bloomberg

Split by inaugural SLB / repeat SLB

Source: NatWest, Bloomberg

Split by number of KPIs

Source: NatWest, Bloomberg

Symmetric coupon step up / down

Source: NatWest, Bloomberg

KPI category (Q1 23 change vs Q4 22)

Source: NatWest, Bloomberg

II. Market Dynamics (since market conception)

Issuers