SLB issuers ‘have higher emissions intensity, lower targets’ than sector peers

Issuers of sustainability-linked bonds (SLBs) have a higher emissions intensity than sector peers and tend to have less ambitious targets, according to a research note from Commerzbank.

The note, which was written by the bank’s head of ESG research Stephan Kippe, analysed the prospects of the label amid slowing issuance. It examined issuers of euro-denominated SLBs against their sector peers in the Stoxx 600.

The carbon intensity of issuers was higher across all five of the highest-emitting sectors, reaching almost three times higher in the materials sector and twice as high for utilities.

On the target side, the average annual reduction targets were slightly higher for SLB issuers in the materials and energy sectors, much higher in the real estate sector, and lower in all other sectors.

While connecting sustainability commitments to financial penalties alone is a credibility boost, Kippe argued, ideally SLBs should also provide an incentive to deploy above-average emissions reduction.

More meaningful targets are “clearly needed”, he added, while noting a risk that widespread failure to meet overly ambitious targets could also harm credibility.

Other areas of concern highlighted in the note included relatively weak demand for SLBs, and the fact that the step-up coupon penalties remain low despite widespread criticism.

Kippe suggested that regulatory uncertainty in the EU over the status of transition assets and the lack of a standard for SLBs could account for the shortfall in demand compared with use-of-proceeds bonds.

“While the regulatory bona fides of green bonds have been largely established following the recent compromise over the EU green bond standard, the prospects for a timely establishment of a similar standard for SLBs are questionable at best,” he said.

Without regulatory certainty and stricter terms, Kippe added, “a full ESG investor-driven renaissance of the SLB space seems unlikely”. This is unfortunate, he said, as the label “would in principle be a good fit for the important ESG transition segment”.