This status check is timely. We’re at the halfway point to 2050, the year in which the world has to achieve net zero emissions if we are to have any chance of limiting global warming to well below 2°C. The deadline isn’t the only thing that matters; the trajectory towards these distant targets us important too. If emissions are not reduced quickly, climate tipping points could render the future targets redundant. A collective understanding of where the transition is moving quickly, and where it’s lagging, is essential.
SLBs as a product are uniquely positioned to offer both transparency and accountability of sustainability progress. By embedding the specifics of KPIs and targets into bond documentation, borrowers are compelled to report progress, rather than potentially adjusting the goalposts to disguise poor performance. And with the significant number of targets being assessed this year, there is the potential for a broad assessment of performance.
We saw four issuers miss targets in 2024. In each case, the SLB offered a valuable hedge for investors, which should support increased issuance going forward. More specifically, each case gave insight into how the issuer is performing on its decarbonisation journey.
Take for example Europcar, a French vehicle rental company. Its SLB was linked to the emissions intensity of its rental cars and vans, and its ownership of green vehicles. The company missed all three of its 2024 targets. While disappointing, it highlighted how challenging decarbonisation of rental vehicles is; EV uptake in rental fleets remains slow, consumers tend to drive them shorter distances, and the economics are challenging for the rental companies. The SLB targets gave insight on these hurdles that may not otherwise have been provided, and supports dialogue around what to do next. And it may even nudge some bondholders to rent an EV for their summer holidays (wink wink).
Rather than demonising individual companies that are missing their targets, the accountability offered by SLBs presents a chance to improve dialogue and engagement, and bring issuers and investors together to focus on achieving much-needed outcomes.
For transition finance to be effective, it must enable measurement and communication of progress with feedback loops that ensure accountability. SLBs are one of the few instruments to be focused on outcomes. In a moment where climate credibility is under strain, such clarity is more valuable than ever.
