The sustainable bond market has passed a milestone. PKN Orlen SA, a petroleum refiner based in Poland, started paying creditors a higher coupon on two local-currency sustainability-linked bonds earlier this year after MSCI Inc. cut its environmental, ...
The development marks a first in a market that’s enjoyed near-unfettered growth in recent years. It’s also a rare example of an SLB whose fate is tied to an ESG ratings industry that’s been the target of. Issuers in the roughly $200 billion SLB market mostly tie their triggers to things like emissions targets or water usage goals.
“We expect SLBs linked to ESG ratings to remain rare in the market,” said Charlotte Edwards, an analyst at Barclays Plc. “Issuers are likely to be reluctant to outsource their key performance indicator calculations, especially given that ESG rating methodologies are generally perceived as opaque by the market.”
A PKN Orlen spokesperson said the company is now “making an effort to boost the efficiency of all areas being assessed by MSCI, which will enable the rating to rise in the future” and trigger a reduction in the coupon. MSCI ESG Research said the change in PKN Orlen’s rating related to an assessment of governance and corporate behavior, with MSCI “finding that its policies and programs to address business ethics and corruption appear weaker than peers in its sector.” MSCI also said that “corporate behavior was introduced as an input to the governance criteria in an update to the MSCI ESG Ratings methodology in December 2021,” which is when the PKN downgrade took place.to be triggered.
SLBs gained their foothold under much more accommodating circumstances, when interest rates were low and regulations in their infancy. Global SLB sales grew almost tenfold last year to around $108 billion, according to Bloomberg Intelligence, with an additional $80 billion so far in 2022. The debt differs from the better-established green bond market, where proceeds are earmarked for environmental projects. Funds raised through SLBs can be used for anything, boosting their appeal for issuers.
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