CBI calls out oil and gas issuers for lack of Scope 3 targets in SLBs

None of the $5.4 billion raised by oil and gas companies under the sustainability-linked bond label was tied to Scope 3 emissions reductions, according to the Climate Bonds Initiative’s (CBI) latest state of the market report.

Scope 3 emissions can account for between 80 and 90 percent of emissions linked to oil and gas firms, but no issuer from the sector used the metric as a KPI for an SLB last year. While Hera and Repsol issued SLBs tied to Scope 3 targets in 2021, 84 percent of total SLB issuance by oil and gas firms as at end-2022 was not linked to the sector’s most material emissions scope.

The CBI described this as “unfortunate” and drew a comparison with the cement industry, where 98 percent of SLBs issued over the same period included the most material Scope 1 targets.

Companies operating in the oil and gas sector have chosen a variety of approaches to SLB targets. Enbridge, which came to the market in 2021 and again in 2022 with sizeable SLB deals, tied its financing to a Scope 1 and 2 intensity target, as well as targets for board and workforce diversity. Malaysian firm Yinson took the novel approach of setting one of its targets as an intensity metric based on the Scope 1 and 2 emissions of its offshore oil assets.

However, Scope 3 emissions are an issue in the wider market as well. Just over half of SLBs issued in 2022 included an emissions target, but only one-fifth of these were linked to all three scopes, and one-third were only linked to one scope.

Renewable energy targets accounted for 8 percent of goals, the second-largest target, while ESG scores and waste were 5 percent each. The CBI criticised bonds linked to ESG scores for being less material to the climate transition, as well as the 6 percent that did not disclose their targets and KPIs for lacking transparency and accountability.

Transition comeback?

While issuance across all sustainable labels in 2022 reached $859 billion, this represented the first ever annual decline in volume after a decade of market growth. This was however in line with the broader debt markets, and ESG-labelled bonds maintained their market share.

Social bonds were the label with the biggest fall in issuance, with a decline of 41 percent. The CBI suggested this was due to issuers no longer tapping the social bond market to fund covid-19 recovery, and that issuers were favouring the green and social mix offered by sustainability bonds.

Of all the labels, the only one to see growth last year was transition bonds. Issuance in the format increased by 5 percent, although only to a volume of $3.5 billion. Of note also were the number and location of issuers, with China and Japan accounting almost all issuance and the number of individual issuers almost tripling.

The CBI said that, while the market has historically trailed other ESG-labelled formats in terms of growth, it could be boosted by other jurisdictions adopting climate transition finance guidelines similar to those published by Japan in 2021.

Rising resilience

CBI’s market report also looks at how far financing is being channelled to climate resilience investments. Of all the labelled bonds in its database, only 19 percent have some kind of resilience-related use of proceeds, and this sank to 13 percent in 2022.

Local government borrowers have historically accounted for the majority of resilience issuance, with the US municipal market one of the biggest contributors. Indeed, the Indiana Finance Authority alone accounted for 3 percent of total resilience bonds issued to end-2022.

The CBI said its findings demonstrated that, while there is a large and well established green bond market, it is currently serving low-carbon rather than resilience investments.

It noted that there was no pipeline for investable opportunities because of a lack of clear, evidence-based definitions of what constitutes a resilience investment, which has led to what it described as a “hidden market” for resilience.

The CBI is developing a resilience taxonomy, aiming to provide a common framework to identify resilience investments. It seeks to catalyse $1.5 trillion of issuance within the labelled bond market for resilience by 2025.