• While the SLB momentum indicates an optimistic outlook for the structure, supply of Sustainability-Linked Bonds (SLBs) was subdued in Q3 2023, as overall volumes capped at EUR ~7 billion vs EUR ~10 billion in the previous quarter. The inflection was visible on an absolute basis but also relative to the total Green, Social, Sustainability, Sustainability-Linked (GSS/S) market of which SLB accounted for ~7% in the last quarter. However, this figure is still up from the ~5% recorded at the lowest point in Q3 2022.
• Recent SLB structures highlight that the market is moving beyond “plain vanilla” step-ups whereby the step-up coupon period starts at the full interest period after the Key Performance Indicator (KPI) report is published, as discussed in a recent article. Certain structures have adjusted this sequence in various ways. For example, some have brought the step-ups forward by 12 months (or 1 interest period), meaning the first coupon step-up is paid a few months after the KPI report. While this offers investors a more immediate economic reward, it could complicate secondary market trading as the accrued interest in the “dirty” price of the bond could suddenly increase post the publication of the KPI report (as, in case of failure, the step-up quantum should then be incorporated in this accrual). Similarly, other SLB structures have been agreed where the step-ups are delayed by 12 months or more.
• The integration of Scope 3 KPIs into financing continues to evolve, as now around 60% YTD of the SLBs, which have environmental KPIs, leverage their Scope 3 targets (66% in Q3 2023). Notably, we’ve seen growing adoption of the Science Based Targets initiative (SBTi) Forest, Land and Agriculture guidance (FLAG) standard (e.g. as in the case of REWE Group and Elo (previously Auchan Holding)) which aims to guide companies in land-intensive sectors in reducing 22% of global greenhouse gas (GHG) emissions from agriculture, forestry and other land use. 
• A newly published academic paper titled “Pricing of Sustainability-Linked Bonds” (authored by Dr. Arthur Krebbers and others) examined the pricing dynamics of SLBs and found that investors are willing to accept slightly lower yields (4-7 basis points) for SLBs due to their ESG label; indicating investor interest in environmental impact. The findings also suggest that most firms set achievable ESG targets (i.e. 73% probability of meeting them) and that the SLB market appears to be efficient, with prices tied to penalty size and no evidence of mispricing. Finally, it suggests that SLBs can act as financial hedges against ESG-related risks.  
• The International Capital Markets Association (ICMA) updated the SLB Q&A based on input from the members of the Sustainability-Linked Bonds working group in September 2023. This new document provides additional guidance on the selection of KPIs, the calibration of Sustainability Performance Targets (SPTs), alternatives to coupon step-ups, change of KPIs/SPTs and reporting requirements. It also includes specific references to sovereign issuers following the June 2023 edition of the Sustainability-Linked Bond Principles (SLBP)  
• Sustainability-linked product innovation continues with Eni, the Italian integrated Oil & Gas company, issuing a sustainability-linked convertible, which marks the second convertible SLB this year (Snam also launched a transition use of proceeds bond exchangeable for existing ordinary shares of Italgas), and the fourth known to the market [1]. Of note, Enel launched a sustainability-linked share buyback programme which will provide for a discount on the price at which the company repurchases the shares linked to the achievement of the selected sustainability objective – i.e. Scope 1  GHG emissions intensity relating to Group Power Generation.

Split by sector

Split by country

Split by rating

Split by inaugural SLB / repeat SLB

Split by number of KPIs

Split by penalty

KPI category (Q3 23 change vs Q2 23)

Split by country

Split by rating

Split by inaugural SLB / repeat SLB

Split by number of KPIs

Split by penalty

Main KPI Categories

ICMA KPI registry core vs secondary KPIs [2]

Split by SBTi commitment 

Split by emission KPI scope [3]

% of observed KPIs that have already been achieved before target date [4]

Target distribution

[1] Determined via data sourced on Bloomberg
[2] Analysis based on sustainability-linked bonds issued as of 20th June 2022 until 30th September 2023
[3] Based on 140 individual KPIs tracked by NatWest
[4] Targets that include components of scope 1 / 2 / 3, i.e. includes partial scope 3 targets