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<\/a><\/p>\nBonds are really just fancy loans, another way to borrow money for a limited period in exchange for making interest payments. Except the money for bonds comes from many public investors, instead of from banks or other private lenders.<\/p>\n
Those investors include people with pensions, who often invest a portion of their money in bonds because they’re considered safer investments than stocks.<\/p>\n
Bonds help finance everything from day-to-day activities to major acquisitions. If a company with a 15% return on capital can borrow money for 4% a year, that\u2019s a no-brainer.<\/p>\n
Yet today, about 5% of corporate debt is labeled \u201csustainable,\u201d or aligned with global climate goals to reach net-zero emissions within decades.<\/p>\n
ESG considerations are stopping some investors from lending to carbon-heavy companies. As the pool of investors shrinks and central banks withdraw support to markets, those companies now must offer higher interest rates to attract lenders.<\/p>\n
Attaching ESG conditions to the debt can persuade investors to rejoin the pool of buyers, helping to lower the interest payments.<\/p>\n
The move toward ESG-compliant debt started with something called a green bond, first issued in November 2008. The money raised by this kind of security must be spent on specific activities that help cut emissions, such as building renewable power plants or increasing building efficiency.<\/p>\n
Even an oil company can attract ESG investors by earmarking green bond money to the right things. That\u2019s one reason the market has grown rapidly; more than $1 trillion worth of green bonds had been sold as of mid-2020.<\/p>\n
But companies can\u2019t raise money with green bonds unless they plan to use it for a specific green project. That\u2019s why SLBs were created: Companies can raise money for any purpose.<\/p>\n
It becomes ESG-worthy by tying the bond\u2019s interest rate (or coupon) to broader sustainability goals. If the company misses the mark, it has to pay a higher interest rate (typically an additional 0.25 percentage point).<\/p>\n
The invention of SLBs is shrouded in mystery. One banker claimed she was the first to pitch the idea to a European corporate giant.<\/p>\n
A finance chief insisted he came up with it on a company ski trip. Others say it was simply a natural evolution of sustainability-linked loans, which in 2021 totaled more than $450 billion. The first of those, made in April 2017, had an interest rate that rose if agreed-upon climate goals weren\u2019t met.<\/p>\n
Sustainability-linked loans are almost always private contracts. That lack of transparency could shield plenty of greenwashing (making an activity appear environmentally friendly when it isn\u2019t), says Andr\u00e9 Abadie, managing director at JPMorgan Chase & Co\u2019s Center for Carbon Transition.<\/p>\n
With bonds, by contrast, the sustainability objectives and financial penalties are made public in sale documents, enabling outsiders to see if the contracts are truly achieving their purpose.<\/p>\n
Over the past six months, Bloomberg News interviewed more than 30 people involved in the SLB market, representing banks, companies, and financial institutions. Their consensus: The industry needs to evolve before it can live up to its potential.<\/p>\n
The SLB market \u201cis broken,\u201d says Krista Tukiainen, head of market intelligence at the Climate Bonds Initiative, a nonprofit that promotes better use of debt for sustainable purposes. \u201cLet\u2019s not kid ourselves that this is moving the needle on climate. It can, but it\u2019s really not right now.\u201d<\/p>\n
In January, Julian K\u00f6lbel of the University of St. Gallen and Adrien-Paul Lambillon of the University of Zurich compared SLBs with regular corporate bonds issued by the same companies within the past five years.<\/p>\n
They found that SLBs typically pay about a 0.30 percentage point lower interest rate than a comparable plain bond. The interest rate typically rises only 0.25 percentage point if a borrower misses its sustainability targets, and it triggers much later in the bond\u2019s life, which means the cumulative interest payments are much smaller.<\/p>\n
That\u2019s why the researchers called SLBs a \u201cfree lunch\u201d for the companies that issue them.<\/p>\n
For now, there are no penalties that are greater than a 1 percentage-point increase in the bond\u2019s interest rate. Both the carrot (a low interest rate) and the stick (a bigger step-up in interest rate) need to be made bigger, says Anthropocene Fixed Income Institute\u2019s Erlandsson.<\/p>\n
Even if the penalties were sizable, Bloomberg News\u2019s analysis of more than 100 SLBs showed that none was at a real risk of triggering the extra payments.
\nLimited Ambition | Tesco greenhouse gas emissions in 2019-20, in metric tons<\/p>\n
Consider the case of the UK\u2019s largest grocery chain. Tesco Plc\u2019s emissions stood at 76.4 million metric tons in 2020. As part of its climate plan, which a respected industry watchdog has approved, the company has committed to reducing direct emissions 60% by 2025 (from a 2015 baseline) and indirect emissions 17% by 2030.<\/p>\n
Direct emissions, which include those produced by the company in its buildings or in power plants providing it electricity, are a mere 1.6% of its total footprint. The rest are the indirect emissions generated by the company\u2019s suppliers or customers.<\/p>\n
Tesco\u2019s corporate goals cover both direct and indirect emissions. But the company\u2019s SLB objectives are linked solely to direct emissions, leaving out 98.4% of its carbon footprint. What\u2019s more, Tesco\u2019s latest sustainability report shows that in 2021 the company was 90% of its way to meet its 2025 direct-emissions target. In other words, the company was already on the verge of meeting its unambitious goal as it was writing the bond documents it presented to investors. Tesco declined to comment.<\/p>\n
After Bloomberg News reported on Tesco\u2019s weak targets last year, one of the banks involved in selling the company\u2019s SLBs held an internal meeting to educate colleagues about indirect emissions.<\/p>\n
In an interview at the World Economic Forum in Davos, Switzerland, in May, Bloomberg News asked Michele Crisostomo, the chairman of Italian power company Enel SpA, whether he considered Tesco\u2019s SLB to be an example of greenwashing.<\/p>\n He said yes. But Enel, one of the world\u2019s biggest users of SLBs, has also failed to tie any of its $20 billion of such bonds to the indirect emissions that accounted for more than 50% of its total emissions in 2021.<\/p>\n A company spokesperson says future sustainability-linked bonds will include a Scope 3 target.<\/p>\n \u201cWe have seen investors start to ramp up pressure with regards to the importance of Scope 3,\u201d says Arthur Krebbers, head of corporate climate and ESG capital markets at NatWest Markets Plc.<\/p>\n Many natural-gas transport companies\u2014including A2A, Nederlandse Gasunie, and Snam\u2014have issued SLBs. Their pipelines send gas across Europe and facilitate much of the continent\u2019s energy use. Yet these companies have tied their direct Scope 1 and 2 emissions only to their bonds, leaving out a huge proportion of emissions.<\/p>\n A Nederlandse Gasunie NV spokesperson says Scope 3 targets are a \u201cwork in progress,\u201d and a representative of Snam SpA says the company is open to including the targets in future bonds. A2A SpA didn\u2019t respond to a request for comment.<\/p>\n \u201cThere are sectors where not having Scope 3 makes the product irrelevant,\u201d says Orith Azoulay, global head of green and sustainable finance at Natixis CIB.<\/p>\n Carrefour SA, the French grocery giant, set sustainability objectives related to avoiding the use of packaging and reducing food waste. That\u2019s good, but it doesn\u2019t set any meaningful goals on emissions. A spokesperson for Carrefour says the scheduled date for its emissions targets was further out than the bond\u2019s maturity date.<\/p>\n At other times, companies set targets linked to the bonds that have little to do with the company\u2019s most significant impacts or actual carbon footprint.<\/p>\n Aeroporti di Roma SpA issued an SLB with the intention of reducing the emissions produced by the transportation of its employees as they come to work at the airport. It left out the vast majority of the emissions that result from flights taking off and landing there.<\/p>\n A spokesperson says ADR can influence only some of the sources of large emissions and thus chose to exclude emissions from planes in the \u201cbinding contractual commitment\u201d needed for an SLB.<\/p>\n<\/a><\/p>\n