While new issue volumes in sustainability-linked bonds are rebounding after 2022’s decline, disputes between companies and analysts over deals are on the rise too. Just days after Italian energy company Eni rejected a think-tank's complaints about its record-breaking retail issue, Nobian has done the same over one of the first SLBs to evade a looming coupon step-up.
Originally part of Akzo Nobel, the privately held Dutch base chemicals company is one of the few to have issued an SLB with a 2022 “observation” of its progress against sustainability performance targets. While it had seemed in danger of missing its emissions reduction target after Scope 1 and 2 emissions rose in 2021, its recent sustainability report showed a 25% improvement last year.
It attributed this to increased use of renewable electricity and lower demand from its electrolysis plants.
Anthropocene Fixed Income Institute, an advocacy group pushing to decarbonise financing, queried this and suggested that the emissions reduction (Scope 2 down 40% year on year) might be due to the way Nobian accounts for steam generated from municipal waste incineration.
Nobian brushed off AFII’s charge, though it acknowledges municipal waste incineration – which is only half (54%) renewable – as playing “an important transitional role in our goal to become climate neutral”.
It does not include this energy source in its Scope 2 calculation, citing the EN 15804+A2 standard, which measures the sustainability of construction works, and lifecycle assessment methodology. It asserted that its approach to waste incineration has been consistent since 2020 – before the SLB was issued.
More generally, the company “appreciates the critical review of sustainability reporting and data [but] we disagree with the statements by AFII on this topic and we reject the suggestion that Nobian’s sustainability reporting would be subject to any kind of creative carbon accounting in the assessment of Nobian’s SLB target being achieved”, a spokesperson said.
“Alongside our auditors, we are confident that the reporting of Nobian emissions [is] in line with best practices and standards,” they added.
DNV Business Assurance gave an independent assurance statement for Nobian’s report. “Overall, we have confidence in the processes and systems to ensure the information presented is accurate,” it said.
Jo Richardson, head of portfolio strategy at AFII, said Nobian might have performed a “carbon footprint arbitrage” since it appeared not to have added waste incineration emissions to its newly launched Scope 3 calculation.
But limited information leaves the situation unclear. “We're not saying this has definitely happened. We're presenting this as a potential which we would like more information on," she said.
Standing its ground
Eni rejected charges by the Institute for Energy Economics and Financial Analysis that its development of a “carbon bomb” gas field in Australia conflicts with its record-breaking €2bn retail sustainability-linked bond, which more than 300,000 private investors bought in January.
“The connection made between a savings instrument – in which thousands of Italians have believed and invested – and an alleged non-existent 'carbon bomb' is incomprehensible and improper to us,” said a spokeswoman for the oil and gas company.
IEEFA charged that Eni’s development of the Verus field (previously known as Evans Shoal) is “at odds with the objectives it pledged to the Italian investing public” and was not disclosed to bondholders.
The spokeswoman disputed that the SLB finances Verus. “The bond proceeds have the sole objective of keeping Eni's financial structure balanced while further diversifying the company’s financial sources,” she said.
Verus is part of Eni’s upstream operations for which it is aiming to reach net-zero Scope 1 and 2 emissions by 2030, one of the bond’s sustainability performance targets.
Much of the dispute appears to hinge on the company’s plans to use carbon capture and storage in developing the field. The spokeswoman said CCS would enable it “to supply decarbonised energy in line with Eni's objectives”, but IEEFA countered that the technology is unproven.
Eni returned to the SLB market on Monday, attracting more than €1.75bn of demand for a €750m four-year institutional offering.
One of the deal’s two SPTs requires it to reduce its net upstream Scope 1 and 2 emissions by 65% from 2018 levels by the end of 2025. The margin steps up by an unusual 50bp if the company misses that and/or an installed renewables target.
Immature product
The disputes seem to reflect the product’s immaturity. Enel only issued the first SLB in 2019, and the International Capital Market Association launched its Sustainability-Linked Bond Principles the following year.
With little consensus over what constitutes ambitious and material SPTs and less investor understanding than for longer-established green bonds, the product seems likely to remain contentious.
“We were very quick on the gun. I’d still be strongly supporting the development of SLBs in the basic concepts, but clearly would also say, ‘look, there's more work to be done here’,” said Jacob Michaelsen, head of sustainable finance advisory at Nordea.
AFII supports SLBs as a powerful transition financing tool with greater reach than green bonds. But “our approach is not to evangelistically support the product at all costs. It's to pragmatically help investors get the information they need and use the product to fund transitioning business”, Richardson said.