SLBs are missing targets. Good.
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SLBs are missing targets. Good.

Dog missed target catching flying disk

First major round of sustainability tests dispels myth of easy KPIs

Sustainability-linked bonds take a lot of flak from investors for their targets being too easy to achieve. But as the first vintage of this often maligned structure comes of age, it is becoming clearer that this widely held opinion is false.

The first SLB was printed by Enel in 2019, but it wasn’t until 2021 that they rocketed in popularity. This means only a handful of the bonds have yet had their sustainability targets tested.

Greek utility Public Power Corp missed its targets last year and looks like it will again this year, while Polish refiner PKN Orlen, whose target on two zloty deals was linked to its ESG rating, also had to pay step-ups.

In Peru, San Miguel Industrias has provided “very limited recent reporting” on the progress towards its targets on a $380m SLB, according to the Anthropocene Fixed Income Institute think tank, making it assign a 50-50 chance of the step-up happening.

A much more prominent event may be coming. Italy’s Enel looks like it will have to pay higher coupons on €10bn of SLBs when they are tested at the end of 2023, the AFII reckons.

While the companies concerned no doubt disagree — because they may have to pay higher coupons as a penalty — missed targets are a good thing.

The more companies fail their targets, the more investors can feel confident they are buying deals with ambitious enough targets in the first place.

Of course, a missed target is not a particularly good outcome for the environment, which is the ultimate objective of environmental, social and governance financing.

But failed targets do have the potential for a real world ESG benefit, even if it is not as immediate as a company hitting its goals.

Assuming the issuers that fail their targets keep printing SLBs — and given that Enel created the structure and has championed it vocally, it is a fair bet — the instrument will receive a massive vote of confidence.

That could encourage investors to consider it more seriously and systematically, and make them willing to give issuers a pricing benefit, compared with normal bonds.

If that happened, SLBs would really be changing capital markets. Issuers would be given a clear incentive to stretch themselves on sustainability. If investors really believe in that, as they claim, they should step up and buy.

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