Sustainable Finance Round Up: October 2023
Our Monthly Round Up series provides clients with condensed trends and take-aways on sustainable debt market movement.
October sustainable bond issuance underwhelmed with U$67B in supply, marking the third lowest month of issuance in 2023, as corporate ESG issuance took a major hit (-75% vs Oct-2022). Conversely, ESG ETFs in the equity space recorded the highest inflows (U$9.5B) since December2021 led by APAC-based funds (US$4.3B). Looking ahead, November has historically been the most active month for sustainable bond issuance with U$112B in supply on average over the past two years.
State of the SLB Market: Largest Issuer Approaches a U$162M Test (3)
A recent report from BNEF found that ~43% of SLB targets are off-track to be met by their observation date, suggesting there is ambition behind these targets. The world's leading SLB issuer, accounting for ~12% (US$31B) of the SLB market, is anticipated to miss its December 2023, testing the tenacity of SLB investors and future of the market.
- Impact of the 2023 observation date: The company has issued 10 SLBs (U$11.5B) with targets linked to reducing Scope 1 GHG emissions intensity by December 31, 2023. If the company misses this target, each bond (with maturities ranging from 2025 to 2031) will realize a one-time coupon step-up, effective until maturity, resulting in US$162M of additional coupon payments over the lifetime of these bonds.
- Notably, this issuance may have been ambitious by setting the SLB target beyond its SBTi-verified emissions reduction target.
- External factors create unpredictability: The energy crisis and prioritization of energy security has driven European government policies which have restricted EU companies from shifting power generating assets away from coal, making it difficult to lower carbon intensity and achieve targets.
- Precedent missed targets: A miss this year would mark the 3rd European issuer to come short of a target. Three of the seven European issuers with 2023 target test dates are off-track to meet their targets, according to BNEF.
- SLB market outlook: While examples of missed targets help to reinforce ambition and credibility in the SLB market, issuers should be careful of balancing ambition and uncertainty as the energy landscape, particularly in Europe, unfolds with two global wars escalating.
- Source: Bloomberg; Corporate/Government bond new issuance volume (excluding loans) as of 10/31/2023.
- Source: Bloomberg; Corporate/Government new issuance volume across sustainable debt products (including loans) as of 10/31/2023 – note that sustainability-linked loan and green loan data is typically revised upwards with a 2 month lag.
- Source: Bloomberg New Energy Finance (BNEF)
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