Nuveen Slams Sustainability-Linked Bonds on Structural Loopholes

Nuveen, the $1.2 trillion money manager, is staying away from one of the hottest part of the sustainable bond market.

While investors embrace newly minted sustainability-linked bonds, or SLBs, and companies are increasingly serious about managing climate risk, the debt structure is “lacking” from the perspective of an impact investor, according to Stephen Liberatore, head of fixed-income ESG and impact investing strategies at the firm.

“We are underwhelmed by the goals and penalties associated with recent SLB deals,” Liberatore wrote in a blog post on Tuesday. “The goals or targets can be gamed to make them relatively easy to achieve, sometimes based on the issuer’s current trajectory, and without the need for meaningful new investment.”

Unlike green or social bonds that can only be used to fund specific projects, proceeds from sustainability-linked bonds can be used for just about anything. The issuer simply pledges to meet some sort of social or environmental target. Global sales of the bonds stand at a record $24.8 billion so far this year, according to data compiled by Bloomberg. Sales could hit as much as $150 billion by the end of this year, according to JPMorgan Chase & Co.

Nuveen Slams Sustainability-Linked Bonds on Structural Loopholes

Nuveen passed on deals from a U.S. high yield issuer and an Indian cement company because the structure allowed the issuers “too much latitude” to invest the proceeds, while the step-up penalties “didn’t create sufficient incentive” for the them to pursue material changes in their carbon footprints. In both cases the securities benefit from a “halo effect” of the tag but reporting will be limited to a singular enterprise-wide carbon footprint or emissions reduction target.

“This makes it virtually impossible for an investor to know how the proceeds of the bonds were directed and what specific outcomes they delivered,” wrote Liberatore, who’s the lead portfolio manager for Nuveen’s $15 billion fixed income ESG and impact investments.

One of the deals that the asset manager reviewed was a 2021 issue with a 2030 carbon footprint reduction goal that used its 2017 carbon footprint as the baseline. In the most egregious case, a structure included a key performance indicator, or KPI, that had already been achieved. In another instance, a deal maturing in 10 years put off the KPI disclosure and potential coupon step-up into the ninth years and the step-up wasn’t steep enough to incentivize the borrower to make the targets a strategic priority, Liberatore wrote.

But all is not lost for the sustainability-linked structure. For starters, it is better than no targets at all, said Liberatore.

“And while it doesn’t meet our impact standards, it may contribute to our view of the issuer as an ESG leader willing to source capital in public markets with a link to goal-setting and accountability,” he wrote.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.