The most common structure involves an issuer paying an increased coupon payment to investors, a ‘step-up’, when a target is missed. One criticism of this structure is a perceived lack of alignment between investors and issuers on sustainability objectives, with the investor seemingly benefiting from an issuer missing its targets.
While we consider that the coupon pay-out should be viewed as a hedge for investors rather than a bonus payment, we note that the market is responding to this concern by developing alternative structures, where the step-up proceeds are used either as a donation to charity, or to purchase carbon credits or renewable attribution certificates.
While these may have identical financial outcomes for the issuer, the SLB will be a different product for the investor. In this note we analyse some example SLBs using these new structues, to evaluate their benefits for investors, issuers, and the broader market.