Sustainability-linked bonds and data management

Sustainability-linked bonds (or SLBs) differ from other types of investments in that they are conditional on the issuer achieving certain objectives.

They are increasingly in demand in the market. There is an implicit commitment, explicit in the documentation, in which the managers commit themselves to improve their sustainability policies. All this within a defined period of time.

The scope of these bonds

Sustainability-linked bonds reached $78.7 billion by 2021 and are products related to corporate finance, but with a specific purpose in mind.

To shed light on this, there are guidelines with recommendations on the principles of these bonds and how they can be structured, disclosed and reported. These documents are designed to make the whole process transparent. In this way, it is hoped that more investors will be attracted to these products. However, SLBs are very versatile and can be applied to any type of financial tool and to any issuer.

Moreover, bond targets can be monitored by means of two instruments:

1. Evaluation according to pre-defined SPTs (Sustainability performance targets)
2. Measurement through predefined and defined KPIs.

Companies that have issued sustainability-linked bonds

Sonae

Sonae is a Portuguese retail company. At the end of 2020 it completed a bond issue linked to sustainability, social and governance indicators for €20 million. The final success of the operation depends on meeting targets related to the reduction of CO2 emissions and the promotion of women’s leadership.

The management was conducted by BBVA bank, through private investors and with a final maturity of five years.

Globo

Globo is a Brazilian media company that controls a free-to-air television platform as well as private channels. The company expressed its desire to issue sustainability-linked bonds and loans to:

• Achieve an SPT for a KPI, namely the reduction of absolute scope 1, 2 and 3 greenhouse gas emissions by at least 15% by 2026. It also wants to increase this amount by 30% by 2030.

The Brazilian company contracted Sustainalytics to analyse both the framework and the targets.

International bond principles

The international principles governing these bonds, which were mentioned at the beginning of this article, establish a very transparent process for issuers and the commitment they make. They can be summarised in five:

1. Selecting KPIs

One of the main aspects to make bonds credible is to choose the KPIs well, above all that they are credible. How do we make them credible? Firstly, KPIs should be related to environmental or governance challenges in the sector where the issuer operates. Secondly, they should be controlled by management. Finally, they need to be internally and externally verifiable.

2. Calibrating SPTs

The calibration of the SPTs (sustainability performance targets) for each KPI gives soundness to the SLB. They define and measure what the ambitions of the issuer are, which gives the product more or less credibility. They provide key information that can affect the achievement of these objectives and must be dictated in good faith.

Among its key features is that each SPT should be compared with several benchmarks. They should also be consistent with other similar objectives of issuers and set a time limit for addressing them.

3. Description of the bond

This principle refers to the structural and financial characteristics of the bond, which are in turn defined by the KPIs and SPTs. These variations, whether due to the achievement of targets or to external elements, will lead to changes in the bond itself. This should also be made very clear in the pre-investor documentation.

4. Reporting

At least once a year, bond issuers have to publish and submit status reports. Among the information to be provided are the performance of SPTs, their impact on bond characteristics, etc.

5. Verify the information

The level of performance of the SPTs should be verified by a qualified external entity, such as an environmental consultant or auditor. The periodicity varies, either on an annual basis or when a feature of the voucher needs to be adjusted.

In short, bonds linked to sustainability and data management are financial products oriented to the fulfilment of certain objectives. In addition to being described with full transparency, issuers have to follow the international principles governing these products. Thus, investors can participate by monitoring the sustainability policy, which can be managed with innovative digital solutions.

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