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Bond investors should expect more ESG KPIs complexity

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Europe’s syndicated loan market is demanding more of borrowers seeking sustainability-linked financing. Recent history shows the bond market lags the loan market on sustainability-linked financing innovation, suggesting investors would do well to pay attention to what is happening in the lending market.

Sustainability-minded loan borrowers have started adding to the key performance indicators in their deals. Until now, three has been the agreed number that banks have required to satisfy themselves that they can brush off any "greenwashing" claims.

But a growing number of corporates want to go further. Last week, Anheuser-Busch InBev signed the largest ever sustainability-linked revolving credit facility, a $10.1bn trade, that had four KPIs attached to the margin.

Some borrowers are said to have asked for five KPIs, particularly on larger deals. The extra burden makes sense from a public relations perspective, particularly given the organisation will already be focusing its operational momentum on reaching environmental, social and governance goals with three KPIs anyway. 

Sustainability-linked bonds (SLBs) came after the loan market pioneered the format. But the adoption of the securities into investor portfolios has been swift and the market is growing. It won’t be long before issuers want to add more KPIs to their SLBs too.

After years where not much happened as issuers and bankers alike puzzled over how to package the KPIs for investors, Italian utility Enel printed the first ever SLB in September 2019.

That deal had one KPI, based on renewable power generation. It worked in part because it was much simpler than the SLB structures investors had been presented with previously. But just a year later, Swiss pharmaceutical company Novartis set itself two KPIs for its SLB debut. And last month, Swedish fashion retailer H&M saw blowout demand for a sustainability-linked deal with three KPIs.

There are difficulties with adding KPIs to bonds. Generally, issuers have been looking to add social and governance KPIs to their deals in light of the coronavirus pandemic and social movements such as Black Lives Matter. 

Fixed income investors are typically uneasy around social and governance metrics compared to environmental ones. It is far easier to measure how much polystyrene has been recycled, or what percentage of energy used is from renewable sources, than it is to judge racial equality on a management board.

But the fixed income market has shown that it is quick to change when it comes to sustainability-linked deals, their public nature means it is a far better PR opportunity for issuers than the confidential loan market.

It is only a matter of time before bonds start to see longer lists of KPIs.

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