AFII raises question marks over how SLB issuer met carbon targets

Climate think tank Anthropocene Fixed Income Institute (AFII) has raised concerns over how Netherlands-based salt and chemicals company Nobian managed to meet a sustainability-linked bond target it had been expected to miss.

The privately owned firm raised €525 million from a sustainability-linked bond in 2021, committing to cut Scope 1 and 2 emissions by 4 percent and increase its renewable energy share to 29 percent, both by the end of 2022. It committed to pay a 12.5 basis point coupon increase per target missed.

While the firm smashed its renewable energy target, achieving a 35.7 percent share in 2022, analysts at AFII and Barclays flagged Nobian as likely to miss its emissions target. Following a 6.7 percent increase in emissions in 2021, the firm was around roughly 10 percent off target.

However, in its 2022 sustainability report, released last week, Nobian claimed a 19.8 percent reduction versus its baseline and said it had met its sustainability KPIs.

This reduction is largely driven by a drop in Scope 2 emissions, which have fallen just over 40 percent year on year. Nobian ascribes this reduction to the amount of contracted renewable energy, as well as lower demand from electrolysis plants.

However, comparison with previous years shows that electricity consumption only decreased by 3.8 percent, while the renewable energy share grew 0.2 percentage points. “It is hard to see how these adjustments deliver the 40 percent reduction reported,” said Jo Richardson, head of portfolio strategy, in the AFII note.

Richardson suggested that the reduction could have come from an increased usage of municipal waste incineration (MWI) to generate steam.

According to widely used standards, Nobian said in its sustainability report that it is not required to include the emissions generated from burning the waste in its Scope 2 emissions. “In line with this guidance, Scope 2 MWI steam emissions are not included in the company’s Scope 2 emissions,” it added.

However, there is not a commensurate increase in Scope 3 emissions, which would indicate an increased usage of MWI.

“It appears that some creative carbon accounting has played a role in Nobian’s SLB target being achieved,” said Richardson.

“Shifting emissions from Scope 2 to 3 to achieve an SLB target is a strategic application of the accounting rules. This could result in an under-inclusion of emissions leading to skewed target reporting to investors.”

Richardson told Responsible Investor that the exercise raised important questions around GHG accounting.

“As emissions accounting becomes more mainstream alongside financial accounting, there are going to be areas where there are not rules and full clarity, and areas which are open to interpretation,” she said.

“We feel that all users of the data should be taken into account. If Nobian has proposed this slightly obscure treatment of MWI steam accounting, we believe auditors should respond, ‘SLB investors are users of this data, are they getting the information and results they need?’”

While auditing processes are developing, Richardson said, “Emissions disclosure needs to be fully transparent, particularly when bond investors are impacted”.

She told Responsible Investor that AFII had requested data on MWI generation and year-on-year changes, but Nobian reports only consolidated figures.

A spokesperson for Nobian said the company appreciated the critical review of sustainability reporting and data.

“However, we disagree with the statements by AFII on this topic and we reject the suggestion in the article of AFII that Nobian’s sustainability reporting would be subject to any kind of creative carbon accounting or in the assessment of Nobian’s SLB target being achieved,” the spokesperson said.

They added that Nobian had treated MWI emissions in the same way since 2020, but had published its rationale for the first time in 2022 in the interests of transparency.

“Alongside our auditors, we are confident that the reporting of Nobian emissions are in line with best practices and standards, and therefore in accordance with the Sustainability-Linked Loan Principles.”

Nobian did not provide responses to a number of other questions asked by RI, including if it would have missed its SLB target if the generation from MWI was counted as Scope 2.

DNV, which provided limited assurance for the subject matter in the report, did not respond to a request for comment.