Sustainability-Linked Debt Finds New Ground

Key Points: Sustainability linked debt’s recent “expansion” into the option to include ESG KPIs isn’t in itself a problem, but products must be labeled appropriately to maintain credibility for this quickly-growing category. Meanwhile, the first sovereign issuance earns a 10 basis point “greenium,” pointing to the benefits of clear (and maybe few) targets.

An option to add ESG KPIs later. Oceaneering International entered into a new $215 Million revolving credit facility last month. The company has the option to implement environmental, social and governance (ESG) key performance indicators (KPIs) at a later date. The potential adjustment to the cost of borrowing following implementation of these ESG KPIs, and verification through established measurement and reporting procedures, is modest: one basis point on the commitment fee and five basis points on the borrowing rate. Analysts have taken issue with Oceaneering’s labeling of its facility as a Sustainability-Linked revolver given the uncertainty as to whether the company will make ESG commitments at all, let alone how ambitious the commitments will be.

Chile issues the first sovereign SLB. In March 2022, Chile issued a US$2 Billion (US$ denominated) sustainability-linked bond, the first from a sovereign issuer. Strong demand led to an estimated “greenium” of ten basis points. At least in part, the demand was credited to the fact that the issuance carried a potential penalty of as much as 200 basis points if the targets, which include only two items and relate to the country’s greenhouse gas reductions, are not met. Further, it was thought that this level of potential penalties might set a benchmark, as well as the fact that the KPIs are simple, for other sovereigns considering similar financing. Chile is an experienced issuer of sustainability bonds — news and analysis service provider Environmental Finance cites US$33 Billion in cumulative issuance — which likely helped smooth the sale process.

Sustainability-Linked was fastest growing green lending sector in 2021. As we discussed in more detail in a recent Payne Financial Post, sustainability-linked bonds and loans grew 245% year-over-year in 2021 to $482 Billion, per Bloomberg estimates, (for comparison, green bonds + loans totaled $642 Billion). Sustainability-linked bonds appear to have maintained its 2021 pace in 1Q22, with US$24 Billion of issuance vs. $103 Billion in all of 2021, per Environmental Finance; in contrast, total ESG issuance (i.e. green, social and sustainable) slowed from last year’s pace by as much as 20%, according to some estimates.

5/5/2022