ESG-Labelled Bonds
Analysis of the relative decarbonisation performance of ESG-Labelled Bond issuers
Published
February 2024
- Given the emission reduction focus of many ESG-Labelled Bonds, we analysed the relative decarbonisation performance of Green, Sustainability, Social and Sustainability-Linked Bond issuers.
- All categories of ESG-Labelled Bond issuers, except Social Bonds, were found to be decarbonising faster than the global control portfolio.
- Sustainability-Linked Bonds (SLBs) are leading the way, according to our analysis, both in terms of historical decarbonisation and projected trajectories to 2050.
- Filtering for Temperature Targets improved the climate performance of the ESG-Labelled Bond portfolios across all categories.
Focus on emission reduction
ESG-Labelled Bonds are heavily focused on climate and, in particular, emissions reduction. Green Bonds are the most popular type of ESG-Labelled Bond, representing 62% of ESG-Labelled Bond issuance last year, according to ICE research. The majority of SLBs also had emission reduction related key performance indicators (KPIs). Indeed, in the SLBs portfolio, 68% of the portfolio had a specific GHG emissions reduction KPI, while 69% of the Green Bonds portfolio had a specific GHG emissions reduction metric.1
While ESG-Labelled Bonds may be issued to fund projects with wider community, social or economic impact, and not just beneficial to the issuer, given their focus on climate and emission reduction we ask the question: Are ESG-Labelled Bond issuers more likely to decarbonise faster than other issuers?
To address this question, we analysed the relative climate performance of sample portfolios covering the different types of ESG-Labelled bonds against a broader control portfolio. ICE’s Climate Transition Analytics Tool, and issuer-level Emissions and Targets database was used to carry out the analysis.
Analysing issuer-level Scope 1 and 2 carbon emissions2, comparing both historical and projected emissions, we found significant, and in some cases surprising, variations in the pace of historical decarbonisation and the projected trends of future decarbonisation pathways among the different categories of ESG-Labelled bonds.
SLBs leading the way
SLB issuers were found to be leading the way when it came to historical decarbonisation, reducing Scope 1 and 2 emissions by 46.40%, closely followed by Sustainability Bond issuers with a 44.66% reduction of emissions since 2015. The relative out performance of SLBs should not come as a surprise given the emphasis on emission reduction KPIs.
For Green Bond issuers, the most popular type of ESG-Labelled Bond by issuance, our analysis identified a slower pace of decarbonisation compared to other sample portfolios of ESG-Labelled Bond categories, except for Social Bonds. Green Bond issuers showed a Scope 1 and 2 carbon emission reduction of 30.43% since 2015. This could be seen as surprising given the climate focus of most Green Bonds, although this is still a faster pace of decarbonisation than the global control portfolio.
The portfolio of Social Bond issuers recorded an emissions reduction of 18.51% from 2015, which is on par with the control portfolio, which showed a reduction of 18.66%. The fact that the Social Bond portfolio lagged the other sample portfolios when it came to the rate of decarbonisation is also unlikely to come as a surprise. The focus of these issuers is more likely to be on broader social impact rather than just their own emission reduction plans.
SLB issuer emission reduction leadership continued when projected future emission pathways through to 2050 were scrutinised under the NGFS Net Zero scenario3. The SLB and Sustainable Bonds portfolios were found to have the fastest decarbonisation pathway through to 2050. Again, the Green Bond portfolio showed a slower pace of decarbonisation than the SLB and Sustainability Bond portfolios, followed by the Social Bond portfolio which showed the slowest pace of decarbonisation among the ESG-Labelled Bond portfolios through to 2050. All of the ESG-Labelled Bond portfolios showed a faster decarbonisation trajectory through to 2050 compared to the global control portfolio.
Chart 1: Estimated Emissions Trajectory Under NGFS Net Zero 2050 Scenario (Scope 1 & 2)
Source: ICE Climate Transition Analytics Tool. Notes: The chart shows the historical emissions (2015-2021) and future projected emissions through to 2050 under the NGFS Net Zero scenario, in terms of tCO2e rebased to 100 at 2015 for each of the Labelled Bond portfolios and the global control portfolio.
This divergence of decarbonisation trends is emphasised when viewed via cumulative emissions over the entire pathway through to 2050. The SLB issuers portfolio showed a faster decarbonisation trajectory than the NGFS Net Zero 2050 scenario pathway to end aligned with the scenario and close to 0% deviation in terms of cumulative emissions.
This was followed by the portfolio of Sustainability Bonds with a cumulative emissions divergence from the NGFS Net Zero scenario of 7.9% in 2050. By comparison the Green Bond portfolio showed a total cumulative emissions divergence from the Net Zero 2050 scenario of 41.6%. The Green Bond cumulative emissions profile was found to be similar to that of the global control portfolio. The Social Bond portfolio showed the largest divergence from the Net Zero scenario at 56.5% in 2050.
Chart 2: Percentage Divergence of Cumulative Carbon Emissions from NGFS Net Zero 2050 Pathway (Scope 1 & 2)
Source: ICE Climate Transition Analytics Tool. Notes: The chart shows the cumulative divergence from the NGFS Net Zero scenario pathway of emissions for both historical emissions (2015-2021) and future projected emissions through to 2050, in percentage terms (2015 base) for each of the ESG-Labelled Bond portfolios and the global control portfolio.
Targets matter
Filtering the portfolios for issuers with published temperature targets found positive results. Not only was a reduction in total cumulative emissions and closer alignment to the Net Zero pathway through to 2050 for all the ESG-Labelled portfolios observed, as would be expected given the direct feedthrough of targets to forward emissions trajectories. But a faster pace of historical decarbonisation was also found across all categories of ESG-Labelled Bonds.
Chart 3: Percentage Divergence of Cumulative Carbon Emissions from NGFS Net Zero 2050 Pathway for Green Bonds with and without Targets (Scope 1 & 2)
Source: ICE Climate Transition Analytics Tool. Notes: The chart shows the cumulative divergence from the NGFS Net Zero scenario pathway of emissions for both historical emissions (2015-2021) and future projected emissions through to 2050, in percentage terms (2015 base) for the Green Bonds portfolio and targets-filtered Green Bonds portfolio.
The most significant impact from the introduction of the temperature target filter on the ESG-Labelled Bond portfolios was seen with Green Bonds, with the cumulative emissions divergence profile becoming more aligned to that of Sustainability Bonds. However, the Green Bonds and Sustainability Bonds portfolios were both not quite able to match the sample of SLBs issuers, which remain the decarbonisation leaders among the ESG-Labelled Bond issuers.
On-Track with targets?
Using the ICE On-Track with Targets Indicator to assess the overall projected alignment of the ESG-Labelled Bonds portfolios to the published temperature targets of issuers also provided encouraging signs. All of the target-filtered portfolios are shown to be On-Track with their issuers published temperature targets, except for the global control portfolio, which is seen as off-track, but within a 20% threshold. This keeps the global control portfolio in the “Amber” category, rather than “Red”, while the target-filtered ESG-Labelled Bond portfolios are all in the “Green” category4.
However, examining the ambition of the targets among the sample portfolios reveals some significant variations. The Green and Sustainability Bond portfolio together with the SLB and global control portfolio all have Implied Temperature Rise (ITR) scores of under 2 degrees Celsius, suggesting Paris Agreement aligned ambitions. The Social Bond portfolio stands out with an ITR above 2 degrees Celsius. This lack of target ambition is likely a contributing factor to the Social Bond portfolio’s divergent emissions trajectory through to 2050.
Conclusion
Our analysis found that ESG-Labelled Bond issuers on average tend to be more aligned to the NGFS Net Zero 2050 scenario compared to the broad global control portfolio, although there are significant variations in the performance of the different categories. SLBs where consistently the most aligned of the categories to the NGFS Net Zero 2050 scenario, while Social Bond issuers were consistently the least aligned.
Green Bond issuers initially showed a relatively poor alignment, second only to Social Bonds. But once the sample portfolios were filtered for issuers with temperature targets the alignment improved significantly, bringing Green Bonds in line with the other ESG-Labelled Bond categories (excluding Social Bonds).
The relative climate performance of SLB issuers and ESG-Labelled Bond issuers with temperature targets suggest the commitment to decarbonisation plans have an additional impact on climate performance and net zero alignment, especially if there are potential financial consequences for non-achievement.
1 Equally weighted sample portfolios for each of the ESG-Labelled Bond categories, Green, Sustainability, Social and Sustainability-Linked Bonds, were created from the ICE Impact Bond database. Only bonds where Use of Proceeds data are available were included. These portfolios were analysed against a control portfolio consisting of a sample of global broad-based large cap issuers based on MSCI ACWI (equally weighted).
2 Scope 3 emissions were not included in this initial analysis given emission reduction projects tend to be focused on Scope 1 and 2. We have also excluded government and related agency issuers from this analysis to focus on corporate issuers.
3 Network for Greening the Financial System Net Zero 2050 Scenario
4 ICE On-Track with Targets Indicator: Emission inline or below expected pathway = Green, emissions within 20% of expected pathway = Amber, emissions more than 20% above expected pathway = Red