Climate Bonds Initiative Calls for Paris Climate Agreement Aligned Targets to Be Included in Sustainability-Linked Bonds

Investors should require companies issuing sustainability-linked bonds to have Paris-aligned targets, according to a discussion paper of the Climate Bonds Initiative (CBI). The growth in SLBs has been substantial: in H1 2021 they formed 6% of the total labelled debt issuance even though the first SLB was only issued in September 2019 by ENEL.

SLBs, allowing companies to borrow more cheaply for general corporate purposes if they meet certain ESG goals over the term of the bond, are one of the most divisive products in the market. While some argue they are key to encouraging entity-level ESG improvements – as opposed to green bonds, which focus on project-level sustainability – others believe the ESG targets being adopted by issuers of SLBs are often opaque and unambitious.

While sustainability-linked bonds and loans allow new sectors, including heavy emitters, to get sustainable financing, some investors say that the coupon step ups – increases in interest rate if the issuer fails to meet sustainability targets attached to the bond or loan – are often too small to be material, and come into effect too close to maturity. Others have criticized the targets themselves, saying that they are often not material to the core of the issuer’s business activities.

CBI called for companies to have robust decarbonization plans, accompanied by meaningful action, internal monitoring and public reporting if they want to issue an SLB. Today it could be hard to determine if the key performance indicators (KPIs) selected by the issuer were the appropriate ones, and many were «not ambitious enough to align with the transition pathways that will be needed for achieving Net Zero by 2050».

Paris-aligned targets should be based on sector-specific decarbonization pathways, and include company-specific KPIs to measure alignment, the CBI paper said. Targets should be set for the short, medium and long term, as well as including Scope 1, 2 and 3 emissions.