H&M Fashion Popularity Matched by New Bond
Fashion group H&M announced the issuance of a E 500m sustainability linked bond to great demand. The issuance was almost 8 times oversubscribed!
Sustainability-linked bonds are a developing market within sustainable bonds, and follow on the success of ‘vanilla’ green or sustainable bonds (the funds of which are used to finance one or more ‘green or ‘sustainable’ projects, the latter linked to one or more sustainable development goals and actions). Sustainability-linked bonds stand out as the funds can be used for general corporate purposes (and therefore are available as a funding tool for a much broader suite of issuers). However, the coupon on the bonds is in some shape or form linked to the company achieving its sustainable goals.
In the case of H&M, it has committed to three goals (or ‘performance targets’): first, to increase the share of recycled materials as inputs to 30% by 2025, second, to reduce the company’s scope 1 and 2 emissions by 20% by 2025, and thirdly, to reduce scope 3 emissions by 10% by 2025 compared to a 2017 baseline.
The first performance target is ‘highly ambitious’, and carries a high weight (40%) with respect to a potential step-up in the coupon.
One of the key issues in a sustainability-linked bond is whether the targets are relevant, material and ambitious. According to Sustainalytics’ second-party opinion, the first target is ‘highly ambitious’ (which is quite remarkable, I have not come across this comment in their other second-party opinions).
The financial impact is also worthwhile mentioning, for two reasons. First, if all three targets are achieved, the financials shall remain unchanged – so the coupon is not lowered, and the company not rewarded. Interestingly, Sustainalytics states that this is aligned with market practice – I am not sure this is the case. Second, each of the three targets carry a specific weight (40/20/40 respectively – so, the most ambitious carries a high weight) for the step-up. As a result the step-up in the coupon may be less than the full amount if not all targets are met.
Overall management of material ESG risk is ‘average’. Sustainalytics is less positive about this, referring to the environmental and social risks relating to worker rights, occupational health and safety, biodiversity loss, land use change and community relations from sourcing and supply chain. Whilst H&M implements a set of standards and policies, it would be interesting to know what NGOs make of its strategy. Investors seem less worried about the potential of ESG risks materializing.