Spread Analysis of the Sustainability-Linked Bonds Tied to an Issuer’s Greenhouse Gases Emissions Reduction Target

Abstract

Sustainability-Linked Bonds (SLBs) are a new type of general corporate purpose bond in which payments are tied to an issuer’s sustainability key performance indicators (KPIs) with respect to the environmental, social, and governance (ESG) criteria. The structure is complementary to green bonds. The Tesco SLBs are linked to the firm’s ability to cut its greenhouse gas emissions by 60%. The priority is to reduce its reliance on nonrenewable grid electricity, which contributed 65% of Tesco’s global carbon emissions footprint. Tesco accounts for 1% of electricity demand in the UK. Failure to meet the goals will result in a coupon step-up by 25 basis points on the last three coupons. The aim of our study is to investigate the presence of, how we call it ‘ESG spread’, marked by negative yield difference between SLB and regular bonds. It is something similar to ‘greenium’, that is, a premium paid by bondholders for green bonds when compared to nongreen bonds. We compare the bid and ask yields of SLBs with the interpolated yields, calculated for the yields of Tesco and Carrefour notes. Then, we look into the SLB yields in coupon step-up scenario to answer the question if the issuer’s failure to keep up with KPIs results in changing of ESG spread from negative to positive.

Mirror, Mirror on the Wall, Who Is Transitioning Amongst Them All?

“…To conclude, the paper makes two important contributions to the existing SLB literature, which has so far been mainly focused on the functionality and pricing of sustainability-linked instruments (Berrada et al, 2022, Kölbel & Lambillon, 2002Vulturius, 2022;Liberadzki et al, 2021), by analyzing the efficiency of the SLB market in ensuring the accessibility and market structures for potential SLB issuers, with a particular consideration for carbon-intensive ESG laggards. In order to ensure a successful sustainability transition of the real economy, the SLB market needs to address those companies that are most crucial for advancing the economy's transition, namely carbon-intensive industries and ESG laggards.…”

“…This is especially attractive for smaller issuers, as it lowers issuance costs. Furthermore, SLBs offer companies the opportunity to signal their sustainability strategy and give them more flexibility in how to use the proceeds to achieve their successful sustainability transition (Liberadzki, Jaworski & Liberadzki, 2021). This is crucial, especially for carbon-intensive industries, because financial institutions are increasingly incorporating sustainability indicators in their risk assessments and credit analysis (BaFin, 2019).…”

“…Consequently, the SLB market has been growing rapidly in the last few years. Nevertheless, investors also show concern regarding the credibility and greenwashing potential of SLBs, especially in regard to the ambitiousness and materiality of sustainability targets and transition pathways (Vulturius, 2022;Liberadzki et al, 2021). However, the existing literature has not yet considered the efficiency of the SLB market in attracting those companies that are most crucial for a successful sustainability transition.…”

How does transition finance influence green innovation of high-polluting and high-energy-consuming enterprises? Evidence from China

“…Through diversi ed nancing channels, it opens a green channel for the green innovation of double-high enterprises, improves the availability of funds for double-high enterprises, and stimulates the enthusiasm of green innovation of double-high enterprises (Wang 2022). The transition nance can also provide diversi ed nancial instruments to help double-high enterprises with insu cient capital to nance their green innovation investments according to their own needs, which improves the convenience of nancing and is conducive to promoting the green innovation activities of double-high enterprises (Liberadzki et al 2021).…”

Influence of financial tools, ESG principles and carbon regulation on the metallurgical industry

“…В настоящее время финансирование зеленой энергетики и устойчивого развития играет важную роль в сокращении выбросов углекислого углерода, развитии экологической инфраструктуры, обеспечивающей достижение одной из главных целей в области устойчивого развития промышленности России. В мире достаточно успешно развивается система финансирования ESG-проектов, в том числе, направленных на снижение выбросов парниковых газов, которые финансируются специализированными фондами и банками [23]…”