Like many of you, I anxiously await the release of the new James Bond film No Time to Die. Sadly, this will be Daniel Craig’s final turn at the role, who in my opinion has been the finest Bond ever. It may also be the last time we see Bond’s stunning Aston Martin DB5. Although after the car’s total destruction in Skyfall, Q did rebuild it for the subsequent Spectre, so maybe there is hope.
One bond that isn’t going away is the sustainability-linked bond (SLB) – at least according to JPMorgan Chase. Last month, Marilyn Ceci, global head of the bank’s ESG developed capital markets (DCM) group offered this prediction:
The SLB market will grow from $6.9 billion (the volume for January-March 2021) to $100 – $130 billion before the end of 2021. She expects the global issuance of green bonds generally to grow almost 50% – to around $690 billion – in 2021 alone.
Shortly after Marilyn made that comment, BlackRock announced a $400 million expansion of a $4 billion revolving credit facility in which it pays slightly lower fees & interest if it meets targets for women in senior leadership and Black and Latino employees in its workforce. The filed amendment contains specifics. We don’t know whether it was BlackRock or its lenders who wanted to add these terms to the debt deal – it helps both sides show that they’re making commitments to ESG, and it could add momentum to the SLB trend.
The first SLB was issued in 2019, meaning SLBs are a newer subset of the broad category of green bonds. SLBs are an interesting animal, offering both carrots and a stick to issuers.
The carrots: SLB proceeds can be used for general corporate purposes rather than being limited to a specific green or social project, and the issuer gets a reputational bump for offering a sustainability instrument.
The stick: if the issuer misses the sustainability goals/performance metrics, they must pay bondholders a premium that is established at issuance. Some are saying this is a different shade of “say-on-climate” – with bondholders determining whether the metrics are appropriate and whether they’ve been satisfied.
Another unique aspect is the economic certainty of SLBs. When evaluating green upsides, much uncertainty is built into predictions – global market conditions, mercurial consumer behavior, pricing dynamics, supply chain risk. It can be difficult to demonstrate the ROI on expenditures related to sustainability performance monitoring or not achieving the sustainability goals. SLB covenants, on the other hand, specifically define the real cost of missing the mark – pre-emptively answering certain “what if?” questions and making an ROI calculation for project monitoring costs more defensible than other green investments.
What You Can Do
If you have the opportunity to raise capital through SLBs, how can you make sure you can verify that you’ve hit your targets? First, knowing the cost of missing SLB sustainability goals in advance should make it easy to justify monitoring and assurance efforts – but here are some wrinkles that could arise:
– Is the company using emissions offsets to achieve at least part of its GHG reduction commitments? There are meaningful risks associated with offsets (see my blog below!) – therefore, additional monitoring activities are warranted.
– Are SLB targets related to social or workplace condition improvements in the company’s supply chain? Companies should consider augmenting industry-wide supplier audit/monitoring programs by either participating directly or engaging qualified third parties to conduct supplier evaluations in parallel with – or as a replacement to – industry programs.
– How is raw data concerning the goals collected and verified? Automated systems such as meters and probes are great, but they are not flawless and need ongoing maintenance. Procedures to detect errors or failure should be put into place and it may be optimal for those to be manual to some extent.
-Lawrence Heim, TheCorporateCounsel.net April 16, 2021
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