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JBS shows SLB label is nothing without scrutiny

Brazil, paper, map, Klabin, Suzano, sustainable, recycle, LatAm, 575
By Oliver West
15 Jun 2021

Brazilian meatpacker JBS made an apparently impressive entry into the world of ESG debt last week with a well received sustainability-linked bond (SLB). While an SLB is an encouraging first step for a company that has for years been under the scrutiny of environmental campaigners, the KPIs in the deal cover a fraction of the company’s emissions, and the deal shows investors need be tougher on SLB issuers if the format is to have value.

For sustainable finance purists, the JBS SLB looks a shocker. JBS has faced years of criticism for its role in the destruction of the Amazon rainforest, where it sources beef to send across the world. Its recent sustainability drive — including gradually eliminating deforestation from its supply chain — has been met with scepticism and anger by some campaigners. After all, JBS and its peers pledged in 2009 to cut out deforestation. But thanks to the SLB label, it is funding itself at a lower cost.

Plenty of market participants feel that polluters should be offered a chance at redemption, with Italy’s Eni having sold the first SLB from an oil major last week, too. This is a welcome development, as the world will be a better place if these companies set and meet their targets than if they don’t. 

Indeed, a company such as JBS braving the world of sustainability-linked debt was a fantastic opportunity to test the mettle of ESG investors — who could have provided considered feedback — and to showcase the SLB format by linking a bond to a tangible issue, in this case deforestation, that most observers could understand.

Ultimately, the deal was swept up in a rush of blockbuster LatAm high yield trades, and a wave of SLBs from around the world. The leads claimed there was no vocal push-back from investors, and many large accounts included the bond in their ESG buckets despite the company not even carrying out a pre-deal roadshow.

Missed opportunity 

But it still looks like an opportunity missed. It would not have required a particularly deep dive for investors to find some important lines of questioning.

First up, the very sustainability agenda that JBS is using to flaunt its ESG-friendly credentials is under fire for being too slow on deforestation. The company in March promised to eliminate illegal Amazon deforestation from its supply chain by 2025, other Brazilian illegal deforestation by 2030, and to have zero deforestation across its global supply chain by 2035. This is a step back from pledges made in 2009, Greenpeace has fiercely argued. 

True, Greenpeace ideals clashing with Wall Street’s eye for a deal is no surprise. Some bankers echoed JBS’s riposte to Greenpeace’s demand that the company should move away from industrial meat production: the world needs feeding and demand for protein is only going to increase.

However, that is a separate question to the global environmental catastrophe of deforestation of the Amazon rainforest. 

Secondly, and perhaps a more central issue for the credibility of the SLB format, is the KPI itself. Tied to a reduction in scope 1 and 2 greenhouse gas emissions, it makes no mention of deforestation.  JBS says that it cannot stop deforestation tomorrow because of the difficulty of monitoring the activities of its tens of thousands of suppliers, and it has been investing in new technologies to improve traceability of the supply chain. But surely an SLB with a KPI measured in 2025 was the perfect opportunity to silence some doubters?

Moreover, by only monitoring the scope 1 and 2 emissions that come from the company’s direct operations, the KPI on the bond does not account for emissions in its supply chain, known as scope 3. Those emissions account for at least 90% of the company's total

This was explicitly laid out for investors by second party opinion provide ISS, which described the KPIs as “not material to the issuer’s scope of impact”.  Given the intraday execution, many fund managers would not have had the time to notice, and some syndicate bankers acknowledge that there are some large portfolio managers out there chasing anything with an ESG label so they can satisfy their end investors.

SLB, no guarantee 

Whether one thinks the structure is flimsy or not, it is true that with this deal JBS has to a certain extent exposed itself, by explicitly inviting those fund managers that have for years gobbled up its bonds to take a deeper look at its practices. It would not have been that much more expensive — the greenium was said to be around 12.5bp per year for a $1bn deal — to sell a conventional bond and dodge the discussion altogether.

In this respect, the SLB increases awareness of the environmental issues in which JBS is entangled. At a bare minimum, in five years, when the KPI is measured, JBS will again be broaching sustainability with bondholders. And JBS CFO Guilherme Cavalcanti told GlobalCapital that the company would look to issue most of its bonds in sustainability-linked format, suggesting the company is happy to continue discussing these issues with bondholders. 

Yet unless investors pay attention to the relevance and materiality of the KPIs, the SLB format is nothing but an easy way for issuers to reduce their cost of funding. Perhaps those investors that have already struck JBS off their investible list for ESG reasons could have highlighted the issues, providing the push-back that was missing on this deal.

What is clear is that SLBs in and of themselves are no guarantee that an issuer is sustainable, nor that it is making enough effort. As more companies from highly polluting sectors look to join the ESG debt party, scrutiny must intensify and investors must study these companies for themselves. 

By Oliver West
15 Jun 2021