New Type of Bond Cuts Investor Bonus for Missing ESG Goals


So-called sustainability-linked bonds have been controversial because they often effectively reward investors when the issuer misses green or social performance goals. One Japanese firm is trying to change that.

Nomura Research Institute Ltd. is selling such notes, but with a twist. Typically, the debt offers extra yield to investors if the borrower fails to meet ESG targets. In the case of NRI’s bonds, if it achieves its goals, the firm can redeem the debt early.

That means that if NRI misses its targets, investors may be stuck with the bond for an extra period of time, though with a higher coupon in line with the longer maturity. Investors tend to prefer that bonds be called at the first opportunity possible to reduce the risk of interest-rate moves.

The bonds, which are scheduled to price on Friday, are the first of their kind in Japan, according to the firm.

For conventional sustainability-linked bonds, “investors wouldn’t want the issuer to meet its targets from an economical perspective, but from a sustainability perspective they want the goals to be achieved,” said Shinya Fukumoto, an assistant manager at the company’s finance and treasury department. “This is meant to get rid of that dilemma as much as possible.”

NRI’s experimentation with the bond terms shows how the booming market for environmental, social and governance debt is still trying to figure out how best to structure securities that pay for green and social causes. There’s also been broader concerns in the market on the need to ensure that ESG debt is really paying for worthy projects and isn’t using misleading labels to undeservedly boost the image of companies.

NRI is planning to sell 5 billion yen ($46 million) of the notes. The yield premium will be 21 basis points for the first 10.5 years and the coupon will be at least 0.32%, according to people familiar with the matter.

The Tokyo-based think tank has set as its goals cutting greenhouse gas emissions and using more renewable energy at its data centers in 10 years’ time. If it hits those targets, NRI can redeem the bonds as early as Sept. 30, 2031, rather than the final due date of March 31, 2033.

NRI’s targets
Cut greenhouse gas emissions by 72% or more in fiscal 2030 compared with fiscal 2013
Use at least 70% renewable energy in data centers in fiscal 2030

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