LONDON (June 29): A new set of ESG debt guidelines is likely draw a line in the market for sustainability-linked bonds, as investors are offered clear metrics to determine which products to buy and which to avoid, according to analysts at Morgan Stanley.
SLBs, which tie a bond’s coupon to an issuer’s performance on sustainability targets, have faced a barrage of criticism amid concerns that the metrics set are often too weak.
Regulators have yet to enforce strict parameters for the SLB market, but the industry itself is now stepping in. On Tuesday, the International Capital Market Association published updated guidance for SLBs. The voluntary rules spell out how to select appropriate metrics, as well as penalties if those metrics aren’t met.
“We expect that new SLBs that follow these better practices will benefit from strong demand and outperform pre-existing SLBs that have weaker structures and targets,” Morgan Stanley analysts including Carolyn L Campbell wrote in a client note on Wednesday. The new recommendations from ICMA “push the entire SLB market toward this higher level of integrity,” she said.
There’s some evidence that sustainability-linked bonds with more ambitious targets are already being rewarded by the market, according to the Morgan Stanley analysts. Overall, though, investor demand for such instruments has remained strong.
The sustainability-linked bond market is a fast-growing segment of environmental, social and governance finance, with issuance increasing around tenfold last year to US$108 billion, according to data from Bloomberg Intelligence. While some have hailed the structure as potentially having more impact than green bonds, soft targets and tiny penalties for missing them risk diluting their credibility.
Growing scrutiny around SLBs comes as credit markets across the board face intense pressure, amid an increasingly hawkish monetary-policy environment. US investment-grade corporate bond spreads breached a key 150 basis-point threshold this week, which analysts and investors say could start to disrupt the flow of credit.
With its stricter guidelines, ICMA is hoping to address concerns around greenwashing as the broader US$4 trillion ESG debt market starts to attract regulatory scrutiny. European lawmakers are currently working on a green bond standard, while in the UK, the Financial Conduct Authority is encouraging issuers to align with market standards such as ICMA’s.
Building trust in sustainable financial products requires “closer oversight of issuers of ESG-labeled debt instruments,” said Sacha Sadan, the FCA’s director of ESG.
“We’re encouraging issuers of ESG-labeled debt instruments to apply relevant industry standards and reminding them of their obligation to ensure any advertisement is not inaccurate or misleading.”
Source: theedgemarkets.com
