Hundreds of Companies Have to Meet ESG Goals This Year or Pay Up

Puertollano II Photovoltaic plant 100MW + 20 MWh Photo by Angel Garcia /Bloomberg

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(Bloomberg) — A growing number of companies are facing deadlines for sustainability commitments they made to lenders years ago, testing a key corner of the market for ESG debt.

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More than 250 bonds globally will face deadlines this year to either meet their sustainability performance targets or face a coupon step-up, according to the Anthropocene Fixed Income Institute. That’s up from the roughly 24 securities facing such deadlines last year, setting the stage for a potential rash of step-ups.

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Firms including Europcar Mobility Group SA, A2A SpA and Legrand SA recently disclosed they missed certain sustainability targets pegged to their bonds. They’re among the expanding set of companies that have been, or soon will be, judged against promises made to investors who bought sustainability-linked bonds. 

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“The missing targets will for sure hinder the trust of investors in the issuers and in the SLB market in general,” said Marta Ferro Teixeira, a fixed income strategist at ABN Amro Bank NV in Europe, where the SLB market is currently concentrated. “As usually, the targets are carbon emissions related, this would mean that companies are not reducing emissions at the expected pace.”

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The misses offer a window into the challenges that come with going green. The debt pays a higher interest rate if borrowers don’t meet ESG targets they set at pricing time, meaning companies face a financial penalty if they miss the goals.

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Companies often disclose whether they’ve met the goals on a delay, only after they’ve collected data on the targets they set. That means the firms with bonds that had observation dates last year are just beginning to come out with updates on their performance, while the ones with dates in 2025 should disclose their progress later this year or next.

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French vehicle-rental firm Europcar fell short of its goal of having 20% of its cars and vans emit less than 50 grams of carbon dioxide per kilometer, with only 11% of its vehicles doing so by the end of last year, according to a company report. 

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Customers have been slower to embrace electric vehicles for renting, partly due to worries over their range, and EVs themselves haven’t fallen in price as much as anticipated, Europcar said. The company faces a quarter-percentage-point hike on the coupon of its €500 million ($579 million) SLB. 

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Italian utility A2A’s step-up on its 1.5% notes, which mature in 2028, comes after it failed to install as much renewable energy capacity as promised, while French industrial firm Legrand’s penalty resulted from failing to hire suppliers with adequately ambitious goals to cut emissions, those companies have reported.

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Legrand said its target miss was evidence of ambitious goals, and that it’s been difficult to obtain formal emissions commitments from suppliers due to the lack of maturity on the topic. A2A said it’s committed to decarbonization and that factors including the European energy crisis in 2022 slowed its investment schedule initially. A spokesperson for Europcar declined to comment.