SLB quality on the up in 2023, finds Climate Bonds Initiative

Highest proportion of SLBs so far met CBI’s methodology, group calls for more transparency on debt for nature swaps.

The quality of sustainability-linked bonds in the first half of 2023 was “the most promising yet”, according to the Climate Bonds Initiative (CBI).

The influential NGO said in its H1 issuance overview that alignment with its methodology for SLBs was the highest recorded. Twenty-seven percent of issuance volume qualified for inclusion, more than double the level in the second half of 2022.

For an SLB to qualify for the CBI database, its targets must cover all material sources of emissions and be in line with relevant decarbonisation pathways. SLBs which meet some of the criteria can qualify as either strongly aligned or aligning.

CBI said the reasons for bonds not qualifying were also improving. Where previously by far the largest reason behind an SLB failing to qualify was lacking GHG targets altogether, this now accounts for just over 35 percent of failures. Partial emissions coverage, pathway alignment and the use of an intensity target are now gaining share as reasons for failure.

The report praises Heathrow Airport’s SLB as an example of sectoral progress. While nine airports have raised $4.2 billion from SLBs, Heathrow’s was the first to include targets relating to flight emissions.

Although the bond itself did not qualify for the database due to issues with pathway alignment, CBI said that Heathrow’s leadership in the area was nonetheless to be commended and urged other airport issuers to follow suit.

The NGO acknowledges that the SLB market is “very much the younger sibling of green bonds” and has had less time to mature, but stresses the need for urgency. It concludes by calling on market participants to ensure that half of all SLB deals in full-year 2023 are in alignment.

Matthew MacGeoch, a CBI analyst focusing on SLBs and transition bonds, told Responsible Investor the target was “very ambitious”.

“We’re looking for the most ambitious SLBs so we’re hoping to be ambitious with this target as well. It’s probably not the most realistic target but we want to push this message out and encourage people to try their best.

“There’s been a lot of valid critique of this instrument but we do see potential. We really want to push for this 50 percent target because at the end of the day even 50 percent alignment is still half of all SLBS not being as credible as they need to or should be.”

The group has had “very positive” feedback from the market on its assessment methodology for GHG targets, MacGeoch said, and is looking at building out the methodology further to look at post-issuance metrics, or social and water KPIs.

Social housing, nature disclosure and sovereign surges

Other market developments highlighted by CBI in its roundup included the growing volume of sovereign issuance.

Sovereigns raised $74.8 billion from GSS+ bonds in the first half of the year, almost two-thirds of which was in Q2, a 35 percent increase on the second half of 2022. Twenty sovereigns came to market, with five debut issuers including India and Malaysia. CBI is now on the lookout for the 50th sovereign issuer.

The CBI highlighted Thailand and Peru as examples of best practice issuance to support social housing.

The bonds have high levels of disclosure on detail of eligible projects and target populations, with broad commitments on impact and allocation reporting, while the issuers are governments of emerging market countries with high income inequalities. The relatively large deal sizes will also allow funding for projects with “prominent social benefit”, CBI said.

Finally, the NGO called for transparency in debt-for-nature swaps. While deals have provided disclosure through press releases and investor briefings, CBI suggested the swaps should adopt frameworks and external reviews, and provide more insight into how projects are funded and their progress.

This will provide assurance to stakeholders that funds are being used for impactful purposes, it said.

Green bonds in their natural habitat

In other green bond news, an economist at the Dutch central bank has proposed a new theoretical framework for understanding why investors hold green bonds.

The research by Martijn Boermans, a senior economist at DNB, proposes a “green bond preferred habitat”, based on previous research into investors who over-allocate to certain market segments and are both less price-sensitive and willing to forego financial gains.

He cites data from end-2022 showing that for European pension funds and mutual funds, green bonds account for 6.9 percent and 5.5 percent, respectively, of their bond holdings. In contrast, insurers only hold 4.2 percent of their bond holdings in green bonds.

Boermans says his findings support a framework in which European mutual and pension funds display a “preferred habitat” to invest in green bonds.

The research has been published as a pre-proof in the Journal of Cleaner Production.