Investor Appetite Drives Pricing Benefits for Sustainability-Linked Bond (SLBs)
SLB Issuers Enjoy Greenium – Latest Climate Bonds Analysis
London: 21/09/2022: 09:00 GMT+1: In a first-of-its-kind analysis, Climate Bonds has reviewed the pricing dynamics of sustainability-linked bonds (SLBs). Qualifying SLBs issued in 2021 and H1 2022 were examined to determine whether there was evidence of a greenium. Within the sample of 37 SLBs, 14 achieved a greenium comprising 11 USD denominated and three EUR. Eleven of the SLBs obtaining a greenium were priced in 2021, and three in 2022.
The SLB market has grown rapidly since Chinese infrastructure company Beijing Infrastructure Investment Co. priced the first instrument in 2018 with a coupon step-up linked to the achievement of social key performance indicators (KPIs). By the end of H1 2022, Climate Bonds had recorded SLB volumes of USD176.6bn.
SLBs are general purpose debt instruments tied to improved sustainability performance at the entity level. They have been celebrated for attracting a wide range of issuers into sustainable finance markets. However, it has also been raised that the strength of environmental key performance indicators (KPIs) forming the basis of these bonds can vary in ambition.
The latest report findings indicate that demand for SLBs remains strong and suggests investors are willing to support a broad range of issuers on their journey to net-zero.
The Green Bond Pricing in the Primary Market H1 2022 Report, released today, is the 14th iteration of a leading series analysing the pricing dynamics of green bonds, examining how these instruments offer pricing advantages for investors and issuers alike. These pricing benefits are projected to continue, given regulatory changes and an increased emphasis on responsible investment.
Sean Kidney, CEO, Climate Bonds Initiative:
“As the world is faced with the coming threat of climate collapse, earmarking capital for climate causes at scale marks a necessary evolution for the finance sector to embrace. These findings show that investors are scrambling to finance the clean corporates of the future, and the corporate world need take notice.”
“The sustainability linked-bond market has emerged with real momentum in recent years. The market offers a great outlet for high emitters to cut climate impact, but commitments must be ambitious. Climate Bonds is working to create standards for the market that can guide best practice investment for a Paris-aligned future.”
Ashley Serrao, ESG Steering Committee Chair, Tradeweb:
“We are seeing continued momentum in green bond trading on our platform, as institutional investors increasingly seek out more flexible, sustainable and liquid investment options. When analyzing European credit bonds in the real estate and utility sectors in the first half of 2022, for example, we saw that bid/offer spreads were tighter for green bonds versus their vanilla counterparts, suggesting that green bonds are being more competitively priced.”
Five highlights from the H1 2022 report
- Green bonds exhibited strong pricing dynamics in the primary market compared to vanilla equivalents
Qualifying green bonds achieved larger book cover and strong spread compression during book building compared to vanilla equivalents. These metrics undoubtably contribute to tighter pricing for green bonds. While the high volatility of H1 made it harder to pinpoint a greenium, 20% of bonds were found to have priced inside their own yield curves. This demonstrates value for issuers.
- Green bonds tightened in the immediate secondary market
After 7 and 28 days, green bonds tightened by a larger magnitude than vanilla baskets and corresponding indices. This is a continuation of a trend observed over several years. This offers value to investors.
- Green bonds maintain better liquidity in the secondary market
Climate Bonds used data provided by Tradeweb to determine whether green bonds offered investors a different liquidity profile in the secondary market, compared to vanilla equivalents in H1 2022. The data demonstrated that green bonds offered more liquidity compared to those in other categories, offering flexibility to investors where it is needed. This could help investors to justify tighter pricing for green bonds in the primary market.
- More EUR bonds from the real estate and utility sectors were green than not
EUR real estate bonds included in the analysis were among the strongest performers outright. In the utility sector, non-green bonds are in the minority. Strong definitions have encouraged prolific issuance in these sectors, and investors of all types cannot afford to ignore green bonds. Culture and policy in the US must catch up to ensure that green capital expenditure is prioritised.
- Sustainability-linked bonds show evidence of the greenium
For the first time, Climate Bonds has studied the pricing of USD and EUR sustainability-linked bonds (SLBs) in its leading report series bond pricing. The result of this analysis suggests that SLBs can help issuers to achieve pricing benefits in the primary market. For now, this appears to be more prevalent among USD denominated instruments, where there is less choice of large green Use of Proceeds (UoP) bonds with adequate transparency. Climate Bonds concludes that investors are willing to support a broad range of issuers on their journey to net zero.
Read the report for a full breakdown of green and sustainability-linked bond pricing analysis.
Webinar: Join us to share the findings of our fourteenth report in our pricing series, in which our expert panel of investors & issuers go behind the numbers.
Sep 21, 2022, 09:00 NYC /14:00 in London / 15:00 Paris
For more information:
Senior Communications & Digital Manager,
Climate Bonds Initiative (London).
+44 (0) 7593 320 198
Communications & Media Officer
Climate Bonds Initiative
Acknowledgements: Green Bond Pricing in the Primary Market H1 2022 has been produced with funding support by Tradeweb.
Notes for Journalists:
About the Climate Bonds Initiative: The Climate Bonds Initiative is an investor-focused not-for-profit, promoting large-scale investment in the low-carbon economy. More information on our website here.
Pricing series: Climate Bonds pricing reports commenced in 2016 and have regularly been produced since. Previous reports can be found here.
Methodology: This paper includes labelled green bonds issued during H2 2021. Labelled green bonds meeting the following specifications are included:
- Pricing date between 01/01/2022 and 30/06/2022
- Currency: EUR or USD
- Benchmark size i.e., >= USD500m
- Investment grade rated
- Minimum term to maturity of three years at issue
- Consistent with the Climate Bonds Taxonomy and included in the Climate Bonds Green Bond Database
Amortising, perpetual, floating-rate, and other non-vanilla structures were excluded. These parameters are designed to capture the most liquid portion of the market while not limiting the diversity of data. All historical data is based on asset swap spreads for EUR denominated bonds. USD bonds are compared to a US treasury curve. All historical data is from Refinitiv EIKON.
Comparable baskets include bonds issued in the same quarter as the subject green bond. Comparable bonds must fit the parameters described above except that they are not labelled, and the use of proceeds is not explicitly green. Baskets comprise the closest possible matches based on the following considerations in order of priority: a) currency, b) market type (EM/DM/Sukuk), c) no other thematic label d) seniority e) maturity, f) credit rating and g) sector, among bonds issued in the same quarter.
If corresponding bonds cannot be found, best efforts are made to find suitable alternatives from the available sample. The resulting baskets area proxy for how the money could have been invested in the same quarter in which the green bond was issued. The number of bonds in each basket ranges from one to ten bonds. Bonds behave differently depending on when they are issued and that geo-political events can affect bond prices from one day to the next. This proxy was designed to circumvent the fact that vanilla bonds and green bonds with similar characteristics are rarely issued on the same day.
Harrison, C., Green Bond Pricing in the Primary Market H1 2022 Climate Bonds Initiative, September 2022
Climate Bonds Market Intelligence is expanding its screening database to SLBs in the coming months.
Also, we have proposals for the structural expansion of the Climate Bonds Standard and Certification Scheme to certify non-financial corporates* and SLBs issued by non-financial corporates are now open for public consultation.