Page 7 - AsiaElec Week 33 2022

AsiaElec COMMENTARY AsiaElec

coupon rate adjustment depend on the firm’s
achievement of a pre-defined sustainability per- This could negatively affect longer-term refi-
formance target (SPT). nancing needs and the issuer’s reputation.
Unlike green bonds, the use of proceeds under “While SLB structures with loose targets could
SLBs need not be specified and can be utilised for undermine an issuer’s reputation and future refi-
general corporate purposes. nancing needs, SLB issuers that can demonstrate
Combining proceeds from green bonds consistent and credible sustainability perfor-
with SLB structures could make these debt mances against their climate ambition will have a
instruments more effective. These hybrid debt better advantage in gaining investors’ acceptance
instruments could boost the issuer’s climate and access to capital.”
ambition via forward-looking sustainability Suggestions for tracking issuers’ climate
commitments. commitments and ensuring consistency with
“Some issuers have also experimented with respective sustainability strategies include a
the ‘use of proceeds SLBs’ as improved efforts to minimum track record of at least three years for
address greenwashing claims,” says Chang. comparability.
Chang said that new hybrid SLBs could have As part of the overall evaluation, adopting
the potential to boost their credibility for greater external references for performance bench-
investor acceptance, which has already received marking is also recommended.
robust demand. As Chang explains, this allows a more holistic
In Chang’s report, investors revealed that assessment with greater credibility and objec-
most SLBs currently have a step-up problem, or tivity for the medium-term tracking of the issu-
an upward adjustment to coupons, when issuers er’s sustainability performance against climate
fail to meet sustainability performance targets ambitions.
(SPTs). These penalties in the form of step-ups “We highlight that SLB issuers must prepare
need to be financially effective and aligned with for a higher level of scrutiny than previously
the size of the issuer’s business profile. faced from the fixed income market. For SLBs to
In addition, weak structures will have an be credible, structures must be tightened further
impact on an issuer’s ability to access new pools with robust, financially impactful and material
of capital, especially from leading ESG investors. SPTs.”™

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