Sustainable-Debt Issuers on a More Credible Decarbonization Path, but Is It Enough?
Key findings
- Corporate decarbonization targets without capital commitments may lack credibility. As of Sept. 30, 2023, corporate issuers of labeled bonds led other bond issuers on our climate-target assessment, suggesting a more credible transition path.
- Issuers of sustainability-linked bonds (SLBs) performed better on these criteria than use-of-proceeds bond issuers. This could help alleviate some concerns about SLBs, although the devil is in the details of each transaction.
- While they led other issuers, many labeled-bond issuers still performed poorly on our climate-target assessment, which may have implications for investors in their security selection and potential issuer engagement.
Given the substantial capital expenditures required to finance decarbonization efforts, corporate issuers have been increasingly using labeled bonds to finance projects along their climate journey.[1] They issued more of these sustainable-debt instruments than supranationals, sovereigns and agencies in 2023.
The funded projects (for use-of-proceeds bonds) or associated targets (for sustainability-linked bonds) should be tied to the issuer's overall sustainability objectives.[2] Given that many of these commitments follow climate-related goals, many investors assessing these bonds might expect companies that have been tapping sustainable-debt markets to be on a more credible decarbonization path compared to issuers who haven't. But are they?
To test this, we identified 931 companies within MSCI ESG Ratings coverage that had at least one outstanding self-labeled green, sustainability or sustainability-linked bond (SLB) in the market in the last three years through Sept. 30, 2023.[3] We then assessed the credibility of their decarbonization targets relative to the 3,437 corporate-bond issuers in our coverage without any such bonds outstanding, using criteria aligned with MSCI's climate-targets and -commitments methodology:
- Did they set an emissions-reduction target approved by the Science Based Targets initiative (SBTi), or have they committed to obtaining one? What emission scopes did their targets cover?
- Have they met any of their historical climate targets, and have they reported being on track to meet at least some of their current ones?
- If they declared a net-zero ambition, were they estimated to be on track to reach it by 2050?[4]
- Were there notable differences between use-of-proceeds (UoP) and SLB issuers on the above criteria?
Quality and comprehensiveness of climate targets across sectors and regions
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Data as of Sept. 30, 2023. "Labeled-bond issuers" refers to corporate-bond issuers in MSCI ESG Ratings coverage with at least one outstanding self-labeled green bond, sustainability bond or SLB in the last three years until Sept. 30, 2023 (n=931). "Other issuers" refers to corporate-bond issuers in our coverage without such bonds (n=3,437). The Global Industry Classification Standard (GICS®) is the global industry-classification standard jointly developed by MSCI and S&P Global Market Intelligence. Developed-market (DM) and emerging-market (EM) categorization is based on MSCI Market Classification. Source: MSCI ESG Research, Refinitiv
Lastly, we looked at whether there were notable differences among issuers that have issued only UoP bonds, those that have chosen only SLBs and those that have issued both types. Interestingly, more SLB-only issuers met our criteria for climate-target credibility compared to the UoP-only issuers, and notably more did compared to issuers who have not issued any labeled debt.
Comparison of issuers who have only issued UoP bonds, SLBs or both
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Data as of Sept. 30, 2023. "UoP-only," "SLB-only" and "UoP+SLB" refer to corporate-bond issuers in MSCI ESG Ratings coverage with an outstanding UoP bond, SLB or both bond types in the last three years until Sept. 30, 2023 (n=931). "Other" refers to corporate-bond issuers in our coverage without such bonds (n=3,437). Source: MSCI ESG Research, Refinitiv
This could help alleviate some of the concerns expressed by some in the SLB market that see their issuers eating a free lunch (in the form of cheaper financing) by setting unambitious key performance indicators combined with mild penalties for not meeting them.[5] That said, the devil is in the details, and the concerns around SLBs may be warranted in some cases, depending on the structure of each transaction.[6]
Looking ahead
Overall, companies raising capital in the labeled-bond market led other corporate-bond issuers in their respective sectors and regions on our climate-target assessment criteria, suggesting they could be on more-credible transition pathways. This finding could contribute to the overall credibility of the sustainable-bond (and loan) market and support its further growth, vital for reaching global climate goals.[7]
That said, while labeled-bond issuers led other bond issuers, only 37% of them, on average, met all our criteria for climate-target credibility (compared to 18% of other issuers). Therefore, in their security selection and potential issuer engagement, investors may consider paying attention to both the quality of the labeled bonds in question (i.e., alignment with recognized frameworks) and the credibility of their issuers' transition path using measurable criteria.
1 Delphine Strauss and Emma Agyemang. “The $100tn path to net zero.” Financial Times, Sept. 6, 2023.
Shamik Dhar and Brian Davidson. “An investor's guide to net zero by 2050: Understanding the investment risks and opportunities created in what may be the largest redeployment of capital in history.” BNY Mellon and Fathom Consulting, October 2022.2 Widely recognized frameworks, such as the Green Bond Principles administered by the International Capital Markets Association (ICMA), advise for the funded projects to be tied to the issuer's core sustainability objectives and business strategy. The same goes for the selected key performance indicators for SLBs, according to the Sustainability-Linked Bond Principles (2023) published by ICMA.3 Our analysis sample included all corporate-bond issuers within MSCI ESG Ratings coverage with an outstanding (self-labeled) green, sustainability or sustainability-linked bond in the last three years until Sept. 30, 2023. Source: Refinitiv.4 Defined as reaching -95% or higher reductions in aggregate Scope 1, Scope 2 reported or estimated and -90% of Scope 3 estimated absolute emissions by 2050. This definition is consistent with SBTi's criteria for net-zero targets. For details on how we estimate if a company is projected to meet such criteria, refer to MSCI's climate-targets and -commitments methodology.5 Imtiaz Ul Haq and Djeneba Doumbia. “Structural Loopholes in Sustainability-Linked Bonds.” International Finance Corp., October 2022.6 Dominic Webb. “SLB issuers 'likely to miss majority of 2022 and 2023 targets.'” Responsible Investor, Feb. 6, 2023. <7 “How green, social and sustainability bonds could change the world.” J.P. Morgan Asset Management and Financial Times, 2023.
Patrick Henry. “What are green bonds and why is this market growing so fast?” World Economic Forum, October 2021. <
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