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Sustainability-linked convertibles should be welcomed

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By Aidan Gregory
19 Nov 2020

Sustainability-linked pricing has arrived in the equity capital markets. This is no bad thing.

France’s Schneider Electric became the first European company to sell a fully sustainability-linked convertible bond, promising to pay investors extra if it fails to hit an ambitious set of ESG targets by 2025.

Sustainability-linked debt structures are beginning to proliferate in the loan and bond markets, but in the equity capital markets they are still a novel idea. In contrast to green convertible bonds, which are already in the equity-linked market, proceeds from sustainability-linked bonds do not have specified green uses, but are linked to pre-defined sets of ESG targets.

In the case of Schneider Electric, the company has made ambitious promises relating to reducing carbon emissions, promoting gender diversity within the company’s ranks and training underprivileged people in energy efficiency.

The market has shown that it is willing to back companies which make bold commitments to raising ESG standards. The Schneider Electric bond was multiple times oversubscribed, according to sources involved. In the eyes of investors, issuers who up their game and take sustainability and the climate emergency seriously will be objectively better companies in the future, whose bonds are therefore more likely to deliver a windfall by converting into cheap stock at maturity.   

Sceptics can argue that Schneider Electric was always going to be a popular issuer, with or without the sustainability-linked structure, due to its rock solid credit rating. Yet by choosing to be the first issuer to issue a sustainability-linked convertible bond, Schneider Electric has shown the market that it takes ESG seriously. More companies should follow its lead.

By Aidan Gregory
19 Nov 2020