Overview: Sustainability-linked Bonds and how they might transform the market

In recent years Thailand has, like many countries around the world, joined in the drive to push sustainable development policies.

Sustainability forms part of the Thai government’s 20-year National Development Plan that was announced by the military junta in 2017.

The plan essentially binds government agencies to pre-set directions, including sustainability development. One of the mechanisms designed to push forward sustainable development has been through the Thai Securities and Exchange Commission. Towards the end of last year, the SEC unveiled its plan to implement the novel concept of sustainability-linked bonds. According to the SEC, this new type of products could incentivize more companies to integrate sustainability development into their business operations.

What are Sustainability-linked Bonds?

Sustainability-linked bonds (‘SLBs’) are a type of financial product in which their performance varies depending on the issuer’s performance. The performance is gauged by an independent evaluator to identify if the issuers have operated their business in a sufficiently sustainable way. In short, the return of the bonds is linked to the sustainable performance of the issuer. For example, in 2019, Enel Group, an italian energy company, issued the world’s first-ever SLB. The bond’s return is linked to Enel Group’s ability to reach at least 55% renewable energy generation by 31 December 2021. If it fails to do so, it would be required to pay a “premium” to investors (i.e., step-up coupon concept). Since Enel, many international conglomerates have followed suit, including H&M where its SLBs are seven times oversubscribed. Based on the review of the SEC’s public hearing document, the SEC is adopting a similar concept, with no key differences. The regulation is set to be enacted in a very near future.

What are the Market Responses?

According to the Thai Bond Market Association’s Senior Executive Vice-president, Ariya Tiranaprakit, the private sectors are receptive to the SLBs initiatives. Many corporations previously lacked the financial transformative tools to go green, despite their commitment to do so.

Previously, the Thai SEC issued its guidelines on green, social, and sustainability bonds in 2018; they are however a “use-of-proceed” bond. This means that issuers can only use the fund raised for a particular “investment project.” For example, to build a renewable energy plant.

The SLBs, on the other hand, do not have such a restriction. This means that issuers can use the capital raised for the purpose of transforming themselves into a green company, if they wish to do so, like what Enel did.

What Next?

Public and private sectors around the world are becoming actively involved in the initiative to combat climate change. The Biden Administration just recently held a climate summit in which major economies have pledged to reduce their greenhouse gas emissions by focusing on technological and innovative solutions.

Thailand as part of the global economy is following suit. SLBs, although in their nascent stage, could be proven useful if used effectively. There are reasons to be skeptical, however. Some companies might find a way to work around this concept in order to green-wash themselves and lure funds from egalitarian investors. The Thai SEC as a supervisory body must remain active and vigilant. Disclosure requirements and recommending external reviewers of issuer’s performance that the SEC proposed could help. But it remains to be seen if they are sufficient. 

One more criticism could be made in that the SEC is currently sitting behind the steering wheel of innovation. Some argue that free movement of funds should be a rule by default. Regulators should only regulate a disclosure of issuing companies to bridge the information asymmetry. Leading the market by regulatory fusillade is less than ideal. Nevertheless, we should give credit to the Thai SEC for their serious commitment in leading Thai economy to the ESG realm. 

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