Breakingviews – New World Defines a Better Model for Climate Bonds


Farmers take part in a tractor rally to protest new agricultural laws at the Singhu border near New Delhi, India, January 7, 2021. REUTERS / Adnan Abidi

HONG KONG (Reuters Breakingviews) – Sometimes the good things are in the details. Sustainability bondholders keep an eye on borrowers’ environmental goals as well as the increase in the coupon they will pay if they miss them. New World Development, based in Hong Kong, offers a turning point in its first SLB: its penalty will not go to bondholders, but to support the environment. It is a better model.

Borrowing to finance sustainable projects is all the rage, and global green bond issuance doubled last year to $ 521 billion. Most of the funds raised are earmarked for specific projects, but SLBs, a subset of the category, are becoming popular with companies that may not have the right kind of projects but want to harness the enthusiasm for sustainable investment.

In SLBs, the product can be used for general corporate purposes, but the borrower pays a penalty if it misses a defined environmental goal. Italian energy group Enel launched the first bond in 2019. Companies such as luxury brand Burberry and Abu Dhabi-based Etihad Airways followed suit. Approximately $ 12 billion worth of SLB has been sold to date.

Investors have generally benefited from any failure to meet their goals by receiving a higher interest rate, but holders of $ 200 million New World notes won’t see a dime; the company will instead buy carbon offsets worth 0.25% of the amount raised. Etihad was the first to make this adjustment during a $ 600 million issue in October. New World’s offering this month was sold more widely to investors in Asia and Europe.

New World targets are hard-hitting. It must achieve 100% renewable energy for all its rental properties in the Great Bay region of China by June 2026, up from 1% currently, or purchase carbon credits worth $ 500,000 per year until the notes expire in 2031. The penalty amount is in line with other SLB contracts, but not much of a burden on New World which paid $ 624 million in financing fees during his last fiscal year.

The structure here removes the perverse incentive for sustainability-conscious investors to get a bonus if a company fails to meet its environmental goals. Now borrowers and investors can focus on the quality of targets and offsets. It’s better for the planet and the credibility of bonds.


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