The market awaits confirmation of the results of three SLBs with observation dates at the end of 2022, from energy companies Enel and PPC, and chemicals business, Nobian.
The only investment-grade security will meet its target based on preliminary results whereas the two high yield securities, are unlikely to achieve their targets. These are both benchmark-eligible bonds, with wide investor bases and they could potentially be the first SLBs included in indices to pay a coupon step-up.
We consider the possible implications of a “thematic default” by Nobian or PPC, in which the issuer defaults on its sustainability objectives. This may lead to dispositions from climate-focused funds and have an associated negative price impact.
Our analysis suggests that a higher percentage of the Nobian SLB is held in ESG-labelled funds than the PPC SLB, and so we expect any reaction to be of greater size.
The resulting price dynamics will give us valuable insights into SLB investor reactions when sustainability targets are breached. We see this as an important development in the market as the SLB product is treated as the rest of the bond market, and sustainability events can drive flows, and sustainability risk forms part of all investor decisions.