Sustainability Linked Bonds
Fighting climate change and ensuring a more sustainable future have become key concerns for society and investors alike. Citizens, governments and corporations globally have increasingly pushed for stronger action plans to achieve these objectives.
As a result, in 2015, the United Nations adopted its Sustainable Development Agenda which includes its Sustainable Development Goals (“SDGs”), a group of 17 objectives aiming at fighting poverty, protecting the planet and ensuring prosperity across the globe.
The same year, the United Nations Climate Change Conference – COP 21 – ended with a global agreement to fight climate change and in particular, to endeavour to limit global warming to “well below 2°C” compared to pre-industrial levels. This agreement also aimed at ensuring the finance sector would play its full role in contributing to the climate change objectives.
In the aftermath of this agreement, the finance industry worked with multiple actors to set the legal and operational framework underpinning the use of green finance instruments. Amongst these instruments is the well-known green bond. A green bond is a debt instrument whose proceeds are earmarked for eligible sustainable projects. In that context, the International Capital Market Association (ICMA) issued the Green Bond Principles which help codify the definition of what can or cannot be classified as green bond. Financial institutions also released guidance and processes: BNP Paribas, for example, released early on its Green Bond Framework, aiming at facilitating the understanding, adoption and monitoring of these instruments. As the universe of finance instruments with a social and environmental focus grew, similar codifications in other areas were adopted. An example is social bonds, debt instrument whose proceeds are earmarked to invest for a specific social goal.
Debt issued to investors by a company in order to finance or refinance projects that will contribute to the ecological transition
Debt instruments similar to Green Bonds but aiming at finance or refinance of social projects
Debt instruments similar to Green Bonds but aiming at finance or refinance of both Green and Social Projects
Conventional debt instruments including specific features and/or pay-offs related to a set of environmental, social, governance (ESG) KPIs
This codification of the market and the strong appetite from investors and issuers alike helped the market for green bonds to exceed USD 250 billion in 2019 (source: https://www.climatebonds.net/files/reports/2019_annual_highlights-final.pdf), a 51% increase from 2018.
Leveraging similar principles, new sustainable finance instruments have appeared over the past few years. While green bonds and social bonds focus on raising capital for specific sustainable projects, another category of products, sustainability-linked bonds (SLBs), behave more like conventional debt instruments. They include specific features related to a set of environmental, social, governance (ESG) KPIs. Depending on annually audited ESG metrics, for example, a company will pay a higher or lower interest rate on the debt, thus providing a powerful incentive for the issuer to work toward more sustainable processes and goals. The ICMA and leading financial institutions have similarly issued rules and codifications to ensure the proper framework for these instruments were in place.
The advantage of such SLBs for companies is that the proceeds are not limited to specific projects. It also establishes a powerful and accountable pathway to support a company’s sustainability strategy. While the first issuers using these instruments were principally large public companies, an increasing range of companies is now leveraging these instruments. In September 2020 for example, the French luxury house Chanel, supported by BNP Paribas, became the first unrated issuer to place public bonds linked to sustainability metrics, supporting the company’s sustainability strategy and incorporating targets approved by the Science-based Targets initiative (SBTI). Through this instruments Chanel set ambitious goals including decreasing its own emissions of greenhouse gas by 50% and its supply chain’s absolute emissions by 10% by 2030 and shifting to 100% renewable electricity operations by 2025. The quality of Chanel as an issuer and the strength of the company’s commitment proved a strong attraction for investors and the bond issuance was oversubscribed, thereby underlined further the appetite for socially responsible investments.
“CHANEL is involved in a significant transformation program to decarbonise its business model. Sustainability-Linked Bonds can be game changers for accelerating climate action, and CHANEL has demonstrated true leadership through the creation of an ambitious, transparent and scientific framework. We are honoured to support CHANEL by structuring and issuing this ground-breaking transaction.”
Jean-Laurent Bonnafé, BNP Paribas’ CEO
Such instruments are key elements contributing to the growth of the wider socially responsible investing segment, offering to issuers and to investors an increasingly broad range of options fitting their needs and enabling corporations to fund the sustainable transformation of their businesses. The SRI assets under management have reached a new high of in excess of USD 1 trillion and the market continues to grow at a very fast pace, highlighting the increasing commitments from corporations and investors to contribute to a more sustainable future.
Private investors in particular show increasing interest for these assets. BNP Paribas Wealth Management takes into consideration clients’ financial profile and experience as well as their personal values and objectives to propose the right investment opportunities that match their values.
The growing line-up of high quality companies leveraging these innovative instruments and the ever stronger appetite from investors are powerful indicator that the tide of green finance continues to rise and will increasingly be transformational!