• The SLB market finished the year with supply down 31% year-on-year (YoY) (EUR 75.6 billion in 2021 vs EUR 52.3 billion in 2022). However, while absolute volumes where down, SLBs continue to account for ca.10% of the total green, social, sustainability and sustainability-linked (GSS/S) market in EUR, GBP and USD (10.2% in 2021 vs 9.8% in 2022); a sign that the decline is mainly driven by macro factors (e.g. rising rates, a shift in monetary policy and more volatility), rather than a rewiring of the sentiment towards ESG integration into financing. One of the key points to note is that compared to the explosive period witnessed in 2021, SLB issuance in the high-yield market has ground to a halt for extended periods over the course of the year.
• What was clear at the end of 2022 is that selection of key performance indicators (KPIs) tends to follow broad themes; a predominance for environmental metrics with carbon / greenhouse gas (GHG) emissions being a core feature of most structures. However, in Q4 2022 there were interesting examples around water management and food waste, both KPI categories being up 6% relative to the previous quarter. On the flip side diversity / training KPIs were not the most popular choice, down by 6%, albeit retaining their spot in the top 5 KPI category when looking at the market overall.
• Specifically on carbon, attention to the strategic relevance and materiality of the KPIs across direct and indirect emissions has continued to be a key area of focus for investors, regulators, and the media. In the US, the case against JBS (a Brazilian meat processor) who issued SLBs in Q4 2022, grabbed headlines and it is likely that cases such as this will compel the US Securities and Exchange Commission to provide additional guidance on climate and risk opportunities in 2023.
• In an effort to address these points companies continue to rely on the Science Based Target initiative (SBTi) for validation of their decarbonisation ambitions. To date, almost a quarter of companies with carbon / GHG emissions KPIs have decided to include their indirect emissions in their SLBs; either as standalone Scope 3 (14%) or a part of their full carbon footprint – Scope 1, 2 & 3 (11%). It’s worth noting that, according to SBTi, if a company’s relevant Scope 3 emissions are 40% or more of the total emissions, a Scope 3 target is required at corporate level. While integration of Scope 3 targets into a Sustainability-Linked Financing Framework (and on new issuances) is an encouraging sign of companies’ full commitment to the Paris objectives, a case-by-case assessment of the source of emissions and practical ability to impact complex value chains must remain top of mind, to avoid oversimplification and setting unrealistic expectations.
• Interestingly, in 2022 a wave of targets from the “first generation” SLBs started to hit (next key milestones are 2025 and 2030) and some companies saw their interest step-ups triggered. For example, PKN Orlen SA, a petroleum refiner based in Poland, began to pay investors higher coupons (5bps), after MSCI cut its ESG rating from A to BBB – the selected metric on this specific SLB structure.
• When looking at the percentage of observed Sustainability Performance Targets (SPTs) that have already been achieved before the target date, it is clear that around 14% of the companies in the sample overachieved their goals, and when they did so, it was typically well in advance of the planned date (only 23% overachieved less than 2 years in advance). On the flip side, fine tuning an SLB’s target is often cited as one of the major complexities in an SLB structuring that requires the right balance of carrot and stick.

Split by sector

Split by country

Split by rating

Split by inaugural / repeat issuance

Split by number of KPIs

Split by penalty

KPI category (change Vs Q3 2022)

Split by sector

Split by country

Split by rating

Split by inaugural / repeat issuance

Split by number of KPIs

Split by penalty

KPI category (change Vs Q2 2022)

Split by SBTi commitment [1]

ICMA KPI registry core vs. secondary KPIs [2]

% observed KPIs where target level has been achieved before target date [4]

Distance to target date when KPI achieved

Target Distribution

[1] Representative of deals with at least 1 environmental KPI

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

[3] Based on 135 individual KPIs tracked by NatWest

[4] e.g. the company set a target to reduce Scope 1 and 2 GHG by 20% by 2025 vs 2019. According to the latest disclosure, emissions were reported to have ‘declined by 25%’, hence the target is shown as “Achieved”. However, note that for unforeseen circumstances emissions could still increase before the target observation date and the issuer may still fail its target.