Bond markets are increasingly a vital source of funding the sustainable futures of companies and sovereigns worldwide. At Milford we believe the future is ripe for sustainable lending with investors more focused than ever on assessing how a company can transition, and fund, into a more sustainable world.
Global issuance of bonds with embedded environmental, social and governance (‘ESG’) goals is forecast to reach an all-time record of over US$1tr this calendar year*. This is close to double the amount issued in 2020 and a 500% increase on levels recorded in 2018. Whilst in the context of the broader debt capital market this remains relatively modest, the rapid growth seen to date in sustainable financing is expected to continue to accelerate.
Green, social, and sustainable bonds (collectively referred to as “Sustainable Bonds”) have been a common funding source for companies over past years, including corporate issuers closer to home in Australasia. Sustainable Bonds are essentially bonds (be it green, social, transition etc.) where companies raise debt and are restricted to using that debt to fund specific projects linked to the label (e.g., a green bond issued by a property company to finance a green building).
Interestingly, boosting the record levels of issuance offshore is the growing popularity of corporates issuing Sustainability Linked Bonds. This is particularly prevalent in Europe with the European Central Bank adding bonds of this nature to its eligibility criteria for its asset purchase program at the start of this year.
Sustainability Linked Bonds (‘SLBs’) differ to Sustainable Bonds such as green bonds which we have seen issued in the Australian and New Zealand debt markets over the last few years. While proceeds of Sustainable Bonds are restricted in terms of use of proceeds, SLBs have no restrictions in terms of their use of proceeds. Instead, issuers of SLBs pledge to improve their performance against tailor made measurable ESG targets by linking this commitment directly to the coupon paid to investors.
In June of this year, Wesfarmers (Australian retail conglomerate) was the first corporate to launch an Australian Dollar SLB with Woolworths (Australian grocery giant) the second hot on its tail last month. Both deals were met with strong broad-based investor demand and Milford participated in both deals. Woolworths pledged to reduce its absolute Greenhouse Gas (GHG) emissions (Scope 1 and 2 in tCO2e) by 2030, in line with a 1.5 degrees Paris Agreement and if it fails to do so on the testing date, investors will receive an additional 0.25% p.a. on their coupon until the maturity of each bond.
Europe has been, and continues to be, the leader in the issuance of both SLBs and Sustainable Bonds. This is not expected to dissipate with the European Central Bank announcing mid-year that it will adjust its allocation of corporate bond purchases to incorporate climate change criteria.
The United States has also seen considerable growth in this space over the last year noting ‘social’ bonds have been brought to the forefront in 2020 largely due a combination of coronavirus and renewed social justice attention.
Compared to the booming global sustainable market, Australasian sustainable bond markets are in their early stages of growth but excitingly we anticipate further issuance and innovative structures to come.
Analysing a company’s environmental, social and governance impacts is an integral part of the research Milford undertakes before investing in a company. Bond investors focus on risk assessment and we need confidence that a company has capacity to repay its debt at maturity and generate sufficient cashflows along the way to meet interest payments. Companies that are firstly forward thinking in addressing their ESG risks and additionally ‘putting their money where their mouths are” strongly aid in instilling this confidence.