Researchers at the French National Research Institute for Sustainable Development (IRD), Eve...
Stitching luxury and science into the sustainability-linked bond market
COP21, the UN SDGs… have contributed towards heightening awareness of the urgency of climate change. Public opinion has gained awareness that the world’s climate relies on a fragile equilibrium. To build a better world, sustainable growth is the only viable economic route. And all actors, be they governments, civil society or the private-sector, have a key role to play in making this become a reality.
Pioneering companies have taken a leading role in their sectors by changing their business models, reducing their environmental footprint and increasing their positive social impact.
The Financial industry has also accelerated these trends by financing sustainable business plans and driving profitable growth. Investors (Asset Managers, Pension Funds) have made bold commitments to ensure their investments follow this direction.
As a result, a new financial asset class has emerged: Socially Responsible Investing (SRI). This segment development has been originally fueled by the Green Bonds, typically used by companies to finance their green projects (renewable energies, water sanitisation, etc…)
Today, SRI has become a mainstream way for investors to channel capital towards climate action, and corporates are quickly turning to them to fund the transformation of their businesses. SRI assets under management have reached a new high of over $1tn, and ESG-focused investment attracted net inflows of over $70bn globally between April and June 2020 alone.
More recently, transition towards a low carbon economy has also been financed by the newly emerging Sustainability-Linked Bonds (SLBs), which can be customized to the specific needs of the different sectors. Channelling the notion of ‘what gets measured gets managed’, SLBs bring scientific and trackable metrics to accelerate the decarbonisation of issuers’ business models. Investors like the transparency of bonds structured on science based targets, as evidenced by consistent oversubscription. CHANEL – the prominent luxury company – has demonstrated its leadership in the SRI space by pioneering €600m sustainability-linked bonds in September 2020.
behind Sustainability-Linked Bonds
Unlike Green or Social Bonds, SLBs are more like conventional debt instruments whereby ESG KPIs are engineered into the bonds, rather than proceeds earmarked for specific projects. Sustainability-linked bonds create an ambitious and accountable pathway to support a company’s sustainability strategy, as missed targets trigger an increase in the coupon rate paid to bondholders.
Science-based targets are becoming a key mechanism to assure investors of the legitimacy of SLBs, whilst increasingly being used in the broader ‘use of proceeds’ sustainability bond market too. The integrity science-based targets bring, is evidenced in the reception from investors; for example earlier this month auto issuer Daimler’s Science Based Targets Initiative (SBTI) aligned €1bn green bond was four times oversubscribed.
Leading decarbonisation in the luxury sector
Philippe Blondiaux, CHANEL’s Chief Financial Officer commented:
“The philosophy of CHANEL is the creation of long-term value for the business and for society. This financing is entirely in line with these principles. In launching these bonds, CHANEL hopes to support the development of the sustainable financing market and the wider social and environmental progress that this type of financing can advance. There is a growing recognition amongst investors that they have a role to play in helping to tackle climate change, and we look forward to engaging with them.”
There is a growing recognition amongst investors that they have a role to play in helping to tackle climate change...
“CHANEL is involved in a significant transformation program to decarbonise its business model. Sustainability-Linked Bonds can be game changers for accelerating climate action, and CHANEL has demonstrated true leadership through the creation of an ambitious, transparent and scientific framework. We are proud to support CHANEL by structuring and issuing this ground-breaking transaction.”
Targets of the Sustainability-Linked Bonds include:
- Decreasing CHANEL’s own absolute (scope 1 and 2) emissions by 50% by 2030 (from a 2018 base year) - equivalent to 66% per unit sold
Decreasing CHANEL’s supply chain (scope 3) absolute greenhouse gas emissions by 10% by 2030 (from a 2018 base year) – equivalent to 40% per unit sold
Shifting to 100% renewable electricity in CHANEL operations by 2025
The emission reduction targets underlying the Sustainability-Linked Bonds were approved by the Science Based Targets Initiative.
The bonds also align to ICMA’s Sustainability-Linked Bond Principles, which provide new guidelines for structuring features, disclosure, verification, and reporting recommendations of bonds.
Andrea D’Avack, CHANEL’s Chief Sustainability Officer explains why their inaugural SLB offers investors an opportunity to support the luxury sector’s transition to decarbonise, and the company hopes to “engage with the investor community and be part of the solution.”
engage with the investor community and be part of the solution.
BNP Paribas leadership on SLBs
BNP Paribas is at the forefront of industry dialogues leading the development of the market, having been involved in three of four SLBs brought to the public market, the first of which was in September 2019 with an SDG-linked bond issued by Italian energy company ENEL. BNP Paribas is a member of the ICMA’s Green Bond Principles and Social Bond Principles Executive Committee, and an active member of the Sustainability-Linked Bond working group. Since 2018, the bank has supported issuers to bring well over 130 sustainable-bond transactions to the market, consistently ranking in the top three for green bonds league tables for the past three years.
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