September 22, 2022: The sustainability-linked bond (SLB) market has continued to mature, attracting a wider assortment of issuers across sectors, but the pricing design of the debt instrument could need more calibration, suggests Sustainable Fitch in its most up-to-date report.
As per the report, cumulative SLB issuance has enhanced exponentially, reaching USD147 billion by June 2022. This accounted for 10% of the full sustainable bond marketplace in 1H22, compared to 1% at the conclusion of 2020. Even though the power and utilities sector has issued the largest amount of sustainability-joined credit card debt in US dollar worth, there is growing range among the sectors represented, such as food and beverage and prescription drugs.
The wider range of issuers and crucial efficiency targets set for SLBs supports portfolio diversification for traders and also improves the availability of issuer-amount sustainability details.
Due to the fact the to start with SLB issuance in 2019, the market has seemingly coalesced around a fixed coupon step-up of all around 25bp, which is activated when an issuer fails to fulfill its predetermined sustainability targets.
Sustainable Fitch’s investigation of the current market discovered no correlation among coupon move-up levels and an issuer’s credit ranking or the bond’s over-all coupon. Even further differentiation of step-up fees to account for variants in the economic, operational and sustainability profiles of issuers would boost transparency for traders.
Contrary to regular use-of-proceeds bonds, SLBs grant issuers far more independence in how the cash elevated are deployed. This signifies it can be tricky for buyers to confirm how proceeds are used and what particular sustainability aims are realized. Much more clarity in the materiality of important overall performance indicators will strengthen trader self confidence that issuer targets are meaningful for their main enterprise actions.
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