The Sustainability-Linked Bond (SLB) market, which began in 2019, is reaching adolescence, with early vintage bonds are reaching the observation dates of their Sustainability Performance Targets (SPT).
Only a handful of bonds have so far been through this test, and the market dynamics of both the period of uncertain sustainability performance, but also once a target is missed, have not yet been well observed.
The most material SLB observation at the end of 2023 is for Enel, the largest issuer of SLBs. Our analysis concludes that the target is likely to be missed and, if so, $10.8bn of bonds will pay a step-up coupon.
Recent market pricing implies a 35% likelihood of the target being missed. It is also interesting to look back on the early vintage of SLBs, to compare with recent structures, to observe market progress. In this population no bonds include Scope 3 emissions, and two SPTs were just to get an emissions reduction plan approved by SBTi.
We believe SLB investors now demand a higher standard of materiality and ambition, as evidenced by some of the stronger structures currently being issued.
