ESG-linked bonds add clauses that let them escape financial penalties
Issuers in a controversial corner of the $6.4 trillion ESG debt market are building in clauses that allow them to sidestep financial penalties, according to BloombergNEF.
A quarter of sustainability-linked bonds — which typically pay investors a higher interest rate if an issuer misses predetermined environmental, social or governance targets — can be redeemed before any penalty is triggered, according to a BNEF analysis published Monday.
The manner in which the bonds are structured effectively provides an issuer with an “exit route if it expects to miss its target,” Maia Godemer, a sustainable finance analyst at BNEF in London, wrote in the report.
Such clauses aren’t the only weakness identified in the BNEF study, which looked at 111 SLBs. Godemer also found examples of flexibility clauses, which let companies adjust their ESG targets after the bond has been issued. And in general, SLBs often entail weak financial penalties for an issuer that doesn’t live up to its targets, she said.
Investors are already cooling to the SLB market. The debt form has started to attract criticism from asset managers, with a number of the world’s largest ESG bond investors refusing to buy the bonds. And early proponents have since voiced concerns that the market risks losing credibility.
After seeing an almost 10-fold increase in sales between 2020 and 2021, the SLB market has since seen a dramatic slowdown. In the year through May, sales of sustainability-linked bonds were down roughly 28% from the same period in 2022, according to Bloomberg Intelligence data. The securities have lagged behind green bonds in popularity amid persistent greenwashing concerns.
SLBs are “riddled with exit clauses, toothless terms and conditions, vague
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