Crédit Agricole CIB has been at the forefront of sustainability-linked bonds from the outset, has continued to deliver innovative deals for a wide variety of corporate issuers, and is best placed to advise corporate clients bringing landmark transactions in the format.
After Enel issued the first sustainability-linked bond, in 2019, it wasn’t until late 2020 that another emerged. But in 2021, the product has taken off, with market expectations for well over €100bn of issuance in the calendar year. The rise of green bonds provided the fuel, Enel provided the spark and the publication of the sustainability-linked bond principles in June last year fanned the flames, says Atul Sodhi, global head of debt capital markets.
“The market was ready,” he says. “Sustainable finance had already grown to a very high level through green and social bonds and it was clear it was here to stay in the bond market. But we still needed a trigger event for SLBs to take off.
“The courage of Enel to approach the market with a step-up KPI structure was the trigger, the turning point the market needed. After that, the SLB Principles gave comfort to the market that there were guidelines that issuers could rely on.
“In autumn 2020, we saw signs that a wave was coming, and now it’s really here.”
The big attraction of SLBs for many issuers is that they offer a route into sustainable finance that doesn’t depend on big, capital-intensive projects, says Sodhi. “A company in a carbon-intensive sector can have a positive trajectory, for instance, or it can be used by a company in a capex-light business that doesn’t have green investment requirements.”
Another attraction of SLBs is that for many issuers, the reporting burden is lower than it would be for a green bond. A green bond requires an issuer to track the assets being funded — which by definition is a new process that has to be put in place, he says. “An SLB largely relies on existing processes on existing commitments, such as the issuer’s carbon footprint.”
Still, the SLB product doesn’t come without some controversy, given that it can be hard for outsiders to judge just how much ambition an issuer is showing and how difficult it is to reach what can be very industry-specific KPI targets.
“We will have to wait and see how the market organises itself in order to have the right benchmarks and the right metrics,” says Sodhi. “There’s a lot of work needs to be done”
Italian oil and gas firm, Eni, showed how SLBs can be relevant to carbon-intensive firms that take seriously their green transition. In 2021 it committed to 100% decarbonisation of all its products and processes – the totality of its scope 1, 2, and 3 emissions — by 2050, and became the first oil and gas firm to publish a sustainability-linked financing framework in May this year.
The four KPIs in the framework, structured by Crédit Agricole, show the range of levers firms have: increasing the share of renewables capacity, reducing its net upstream carbon footprint, reducing its net greenhouse gas lifecycle emissions, and reducing its net carbon intensity.
“It shows the possibilities that SLBs have to assist a company across a number of different levels to manage its transition,” says Sodhi. “It makes it a really powerful instrument with a high degree of flexibility and adaptability .”
He also points to deals for Aeroporti di Roma, the first SLB from an airport, and glass packaging firm Verallia as showing how KPIs can help a diverse group of companies on their sustainability journey.
The SLB approach might not yet have convinced everyone in the market but Sodhi says that the product can have a much more transformative effect on companies than issuing a green use-of-proceeds bond. “It takes more time to develop the long term corporate-level objectives in an SLB, making it more challenging from a timeline point of view, but also it makes it more durable from a long term point of view.
“Once a corporate signs up, it’s committed for the long term, while a green bond can be done once and never again.”