CapitaLand sells a hot panda bond

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💡This week: If you’re a sustainable finance banker looking for a hefty salary bonus at the end of the year, maybe give CapitaLand Investment (CLI) a call.

The Singapore property investment group recently priced its second sustainability-linked panda bonds, adding to a well-stocked pantry of sustainable finance instruments. Panda bonds refer to renminbi-denominated bonds issued by foreign borrowers.

CLI this week priced the 1 billion yuan private placement of three-year sustainability-linked bonds to yield 2.8 per cent. It was the second tranche of a debt issuance programme, with proceeds earmarked for refinancing existing borrowings. The first tranche priced at a yield of 3.5 per cent in March this year.

The sustainability-linked feature for both series of bonds imposes energy consumption intensity reduction targets on CLI for its China properties, with penalties for missing them. Sustainability-linked structures typically adjust coupons depending on borrowers’ performance against sustainability-related targets.

Purposeful financing

In March, CLI was the first Singapore company to issue a sustainability-linked panda bond. The panda bonds add a new facet to CLI’s sustainable finance strategy, with S$18 billion of labelled financing obtained since 2018.

Most of those have been sustainability-linked loans. CLI has also taken green loans, bonds and perpetual securities. The green labels indicate financing where proceeds may be used for only environmentally sustainable activities.

That commitment to sustainable financing is a deliberate financing strategy for CLI. By raising different types of sustainable capital, CLI opens more doors for the future raising of discerning capital. It’s money that would not be available to CLI if the company wasn’t sufficiently sustainable.

Asked to explain the benefits of the panda bond deals, CLI said: “By utilising green financing, we are able to expand our pool of capital partners, attracting more like-minded and socially responsible investors and financial institutions.”

As an added bonus, the sustainability-linked structure can, in some cases, offer savings on interest expense. In its 2023 sustainability report, CLI said savings from reduced interest rates on its sustainability-linked debt will be redeployed to support environmental, social and governance (ESG) initiatives.

Target-setting

The sustainability-linked structure can be especially attractive for companies already committed to sustainability goals since they are going to be doing the work anyway.

For instance, to avoid the penalty on the latest panda bonds, CLI must lower the energy consumption intensity of its China properties by 7.5 per cent from 2019 levels by 2025. For the March bonds, the target is a 6 per cent reduction by 2024. Those targets are aligned with CLI’s existing commitment to reduce carbon emissions.

“As we strive towards CLI's target to reduce Scope 1 and 2 carbon emissions by 46 per cent (from 2019 levels by 2030), a linear reduction rate of 1.5 per cent per annum for energy consumption is set for China properties,” CLI said.

As at end-2023, CLI’s group-wide energy consumption intensity was already around 15 per cent below 2019 levels. CLI has not disclosed the energy consumption intensity of its China portfolio, but the group-wide pace suggests that the panda bonds’ targets are likely to be met.

That CLI might so easily hit its targets could draw some criticism, given that observers have raised concerns about the lack of additionality and ambition in performance targets.

The appropriateness of targets is a complex matter. The International Capital Market Association (ICMA) sustainability-linked bond principles state that performance targets should “represent a material improvement in the respective KPIs and be beyond a ‘Business As Usual’ trajectory’” but do not specify what counts as “Business as Usual”.

If Business as Usual means a scenario in which the company did nothing to improve its sustainability, then the panda bonds’ targets are fully compliant. CLI’s net zero targets have been validated by the Science Based Targets Initiative as being aligned with a scenario that limits global warming to 1.5 deg C, so as long as the bonds’ targets are aligned with that pathway, the sustainability-linked bonds are supporting a credible decarbonisation transition strategy.

However, if Business as Usual carries a stricter notion of additionality – which means that the targets should be beyond what the company is already doing – then the panda bonds might not qualify since CLI is already ahead of its required pace.

The first definition is probably the more useful one for sustainable finance in general. Alignment with a credible net-zero pathway is already ambitious. Imposing a ratchet on ambition beyond a net-zero pathway might inadvertently punish early movers, depriving those that cut more early and rewarding those that take their time.

🌱Top ESG reads:

1. Singapore’s Keppel and Japan’s Sojitz are teaming up to provide energy-as-a-service and bioenergy and resource recovery solutions in the Asia-Pacific.
2. Cycle & Carriage has clinched exclusive distributorship for Taiwanese group Gogoro’s battery-swopping systems and electric scooters in Singapore.
3. Six South-east Asian stock exchanges have agreed to build a regional sustainability ecosystem, including data infrastructure.
4. America will support Indonesia as one of seven countries to become a semiconductor hub, a US official has said.
5. The energy transition “has got to be sustainably profitable”, says Shell Singapore chair Aw Kah Peng.

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