Looking beyond the ESG self-label: Acuity’s scorecard for identifying best-in-class sustainability-linked bonds

Plans and targets: why we prefer comprehensive plans and absolute targets

We expect issuers to disclose comprehensive plans for achieving their targets with a clearly laid out timeline for future KPI achievement. Some issuers provide only interim targets, to be achieved in a year midway between the SLB’s issue date and its maturity, while the level of achievement expected in each year leading up to the interim/final KPI is not disclosed. Issuers that outline (at least) annual expected SPT achievement levels are rated high – even though missing these annual targets may not lead to a penalty being triggered – as it boosts confidence in the issuer’s sustainability efforts. Furthermore, we expect issuers to report their progress on achieving targets at least annually and to make these disclosures easily accessible via their websites, sustainability reports or universal registration documents.

We also prefer SLBs that carry absolute targets over those that carry relative or intensity targets. An absolute target refers to, for example, an ambition of an issuer to reduce total GHG emissions to 50kt of CO2e by 2025. A relative target refers to, for example, an issuer aiming to reduce total GHG emissions to 50kt of CO2e per 1EURm of revenue by 2025 – this is a ratio of emissions-to-revenue. We believe that relative targets are less ambitious, as the ratio could be subject to manipulation by the issuer to report a reduction in emissions intensity, when in actuality, higher absolute emissions (the numerator) could have been more than offset by even higher revenue (the denominator).

The sustainable financing market becomes more efficient as impact investors are drawn to transparent issuers

The SLB: A seven-year, 2.375% EUR-denominated hospitality-sector bond with an IG credit rating

Benefit to the SLB issuer: Optimisation of its cost of debt, with proceeds used to refinance existing debt that includes a EUR500m 3.625% bond due in September 2023. The SLB saw strong market demand and was 3.5x oversubscribed.

Our ‘transparency and integrity’ impact assessment: Acuity’s scoring framework rated the bond outstanding under this pillar, as (1) the issuer’s SLB framework discloses a clear timeline of annual interim targets, (2) the issuer would report SPT achievement levels at least annually or more frequently when required and (3) KPI achievement levels would be disclosed both on the corporate website and in its universal registration document or in a sustainability report, together with any additional information on material changes to KPIs. The issuer has also set absolute Scope 1 and 2 (SPT 1) and Scope 3 (SPT 2) reduction targets, which we score positively.

Benefit to ESG investors of using our scoring framework: Investors need to monitor the progress of SLB issuances towards achieving their SPTs. Acuity’s scoring framework will help investors identify issuers that would provide relevant, material, up-to-date and accurate information following issuance, and avoid issuers that seek to greenwash at the reporting stage.

However, absolute targets are not immune to manipulation either, as evidenced by the recent divestment of coal plants by an Asian energy company, where the company in question retains the right to use the assets that would appear as financial assets on its balance sheet as opposed to physical assets. The company’s absolute emissions would reduce – but only on paper, not in reality. This gives rise to the question of whether a company is truly ambitious about its sustainability targets if it merely shifts ownership of unsustainable assets rather than shutting these assets down completely. Therefore, our ratings framework factors in issuers’ ESG track records, on a case-by-case basis, and notches ratings based on their history of sustainability practices.