Sustainability Linked Bond Principles

Breakdown between the categories of sustainable bonds

46% of issuance so far this year comprised green bonds, with a further 34% of social bonds and 15% sustainability bonds. These data can be analysed in a few ways. The first noteworthy point is that green bonds have their lowest ever share of overall market activity.  Social bond market has been particularly active in Europe, with the European Stability Mechanism issuing a EUR 2 billion social bond, the EU issuing a further EUR 9 billion under its Support to mitigate Unemployment Risks in an Emergency, or SURE programme in March, and the French government agencies particularly active: CADES issuing EUR 4bn, USD 5bn and EUR 5 billion in January February and March respectively, and Unedic issuing EUR 3bn.  The EU is set to raise a further 13 billion euros ($15.43 billion) from the sale of five- and 25-year social bonds to fund its SURE unemployment scheme via a syndicate of banks at the end of March 2021.

Understand new frontier in sustainable finance

A second way to analyse the data in the chart is the split between the “use of proceeds” model and the newer Sustainability linked bonds, or SLB, with an issuer-level sustainability target. Use of Proceeds bonds account for over 95% of issuance so far this year.

What are Sustainability-linked bonds?

Sustainability-linked bonds (“SLBs”) are any type of bond instrument for which the financial and/or structural characteristics (i.e., coupon, maturity, repayment amount) can vary depending on whether the issuer achieves predefined Sustainability / Environmental and/or Social and/or Governance (ESG) objectives within a predefined timeline.

What are the core components of Sustainability-linked bonds?

• Selection of Key Performance Indicators (KPIs)
• Calibration of Sustainability Performance Targets (SPTs)
• Bond characteristics
• Reporting
• Verification

Natixis survey: Assessing appetite for sustainability-linked bonds

Natixis surveyed 40 global investment managers, with some US$20 trillion in assets under management, on their appetite for SLBs.  They found that 88% of respondents either were, or were planning to, buy these instruments, rising to 94% for ESG specialists.  It is perhaps telling that the lowest demand, at 80%, came from green specialist investors.