Impact bond quarterly update: Q3 2022 | Insight Investment

Analyst assessment:

The bond’s proceeds target a range of environmental and social objectives, with clear use of proceeds and project eligibility criteria. The issuer also commits to annual reporting on the allocation of proceeds and outcomes with third party verification. Environmental targets pertain to renewable energy deployment, energy efficiency and natural resource management, in support of the company’s firmwide targets. Detailed thresholds are provided for all eligible green project categories. Social targets pertain to widening access to healthcare (in both the domestic US market and low/middle income countries) and fostering economic empowerment. Social KPIs are detailed with regard to their materiality and relevance to the healthcare sector, explaining how these will be monitored going forward. KPIs in the social category are seen to be particularly ambitious, going beyond business as usual for the sector, and a major source of potential impact. Areas of potential improvement include look back reporting and a detailed exclusions list. The issuer has committed to reporting on the former within a year.

Analyst assessment:

This issuance focuses on financing energy efficiency measures and green buildings, renewable energy deployment in operations and product circular economy investments. The use of proceeds of the bond are tied to the company’s sustainability strategy, particularly reducing direct emissions intensity and improving resource efficiency. Whilst detailed project eligibility criteria are provided for green buildings (in line with recognised international standards) this is not the case for other eligible projects, and level of detail provided for each category varies substantially. Exclusion criteria were similarly seen to lack detail for important issues such as fossil fuel financing, although the second party opinion notes that these activities would be excluded. Exclusions do address labour rights, which have been a historical source of controversy for this issuer. The bond framework demonstrates good governance and reporting practices, including commitments on reporting allocation and impact outcomes, and metrics are detailed. However, no look back period for financing is included, which is an area of concern as many projects listed appear to have links to existing assets.

Analyst assessment:

This issuance is intended to finance renewable energy, circular economy, natural resource management and energy efficiency improvements across products, raw material sourcing, production processes and technologies. However, the bond proceeds are being used for refinancing purposes and existing projects (over 70%), limiting the overall impact of the bond. Other concerns include a lack of targeted eligibility thresholds for energy efficiency or water efficiency improvements driven by funded projects, as well as the lack of exclusion criteria for fossil fuels. The latter is seen as a particularly important omission given the bond is targeting renewable energy capacity additions and reductions in carbon emissions intensity. Moreover, whilst the issuer commits to disclosing allocation of proceeds annually, no split has been provided between the four eligible project categories, each of which could entail a wide range of sub-project types. Notably, the issuer lacks a dedicated green bond committee for project evaluation and selection, with projects selected as part of the company’s normal investment project assessment and capex approval process.