Bonds Linked to Good Deeds Lure Yield Chasers Indifferent to ESG
By Clara Hernanz Lizarraga
(Bloomberg) — More sustainability-linked bonds priced in
Europe last week than in the whole of 2020, as investor hunger
for yield overrode questions about the ambition of the issuers’
environmental targets — or even their relevance.
A flurry of sales saw 6.2 billion euros ($7.5 billion) of
deals, compared with just 3.9 billion euros last year, according
to data compiled by Bloomberg. That came as strong demand
tempted firms to borrow more, with Teva Pharmaceutical
Industries Ltd and auto parts maker Faurecia SE both increasing
the size of their offerings.
It shows the meteoric rise of this type of asset class in
2021, as it proves increasingly popular among companies to lower
their borrowing costs by meeting sustainability targets. For
investors, the yields on offer — 4.375% on the longest portion
of the four-part Teva deal and 2.75% on Faurecia, both rated Ba2
— explain much of the appeal. The average yield for BB-rated
euro denominated bonds this year was 1.9%. The rush of SLBs has
not been interrupted by criticism of some issuers’ overly soft
goals — or ambivalence about their environmental criteria.
“We bought them despite a slightly weaker SLB program
behind it,” said Hendrik Tuch, head of fixed income at Aegon
Asset Management, which bought four of the high-yield SLBs out
last week in Europe. “In the end, they were priced adequately to
put them in our portfolios.”
Read more: Teva Sells Record $5 Billion of Sustainability-
Linked Bonds
Global volumes of SLB bonds have surged to $84.6 billion
this year, from $9.2 billion in 2020, as the corporate world
comes under increasing pressure to act on environmental issues.
Investors at the United Nations COP26 summit in Glasgow this
week pledged $130 trillion to help fight climate change. 
“There’s a demand from some investors who are just catching
up with sustainability and buying everything with a
sustainability label,” according to Robin Usson, a fund manager
at Hermes Investment Management.

Strong Demand

Israeli firm Teva went to the market for $4 billion and
came back with $5 billion, including 2.6 billion priced in
euros. French auto parts maker Faurecia also boosted the size of
its original 1 billion euro deal by 20%. Polystyrene packaging
maker BEWi ASA was the latest high-yield name to issue an SLB on
Monday, with EU90m of notes which may price today.
Yet Teva, for one, could avoid paying a penalty for missing
its target altogether, given the short amount of time between
the bond’s maturity and a potential rate increase, as well as
the possibility of redeeming the notes prior to the step up.
Benjamin Sabahi, head of credit research at Spread Research,
described the targets as “part of the greenwashing trend we see
in the euro high-yield market.” 
Vishal Khanduja, director of investment-grade fixed-income
portfolio management and trading at Eaton Vance Corp in Boston,
said the Teva bonds “stopped short of meeting our criteria.” He
noted that the targets didn’t include so-called Scope 3
emissions, the indirect emissions that occur in a company’s
value chain, even though they make up 90% of the firm’s
greenhouse gas emissions.
Representatives of Teva didn’t respond to requests for
comment by phone and by email.
Faurecia’s deal has also disappointed some investors.
Usson, from Hermes, argued that the cost to the company for
failing to meet its targets would be limited because the
assessment of the performance that can trigger the penalty will
take place just eight months before maturity. 
In response, a spokesperson for the firm said that its
step-up “underscores Faurecia’s commitment to reach its target
and – at the same time – offers investors compensation should
Faurecia miss them.” 
Usson blames the trend for pitching deals with inadequate
sustainability targets not on the issuers themselves but on the
bankers advising them, who are eager to satisfy market demand. 
And, to be sure, there were some more stringent goals among
the deals on offer. French glass bottle maker Verallia’s 10-year
SLB demonstrates more commitment to meeting targets, according
to Usson. “The first assessment of sustainability performance
targets is in 2025 so if they miss the company will be penalized
for the five years of remaining coupon,” he said.
money or not if they don’t find the plan credible.”