Sustainable Investment

ESG Disclosure Law Would Aid US Corporate Sustainable Debt Issuance

A uniform disclosure framework would help ESG investors adhere to investment guidelines by providing better transparency and comparability across issuers

Fitch Ratings-Chicago-13 July 2021: US corporate issuance of green bonds, sustainability bonds and sustainability-linked bonds/loans could accelerate if legislation requiring public companies to disclose certain environmental, social and governance (ESG) metrics becomes law, says Fitch Ratings. It would expand access to capital for issuers with exposure to green-house gas emissions as assets dedicated to sustainable investing continue to grow.

The passage of the ESG Disclosure Simplification Act of 2021 by the US House of Representatives in June underscores the Biden administration’s focus on policies related to climate change, underrepresented groups and governing corporate America. Legislators indicated the action is in response to investor reports that voluntary disclosure of ESG metrices is inadequate.

Whether the legislation passes in the Senate is uncertain. However, if the proposed legislation becomes law, standardized disclosure of ESG metrics, as determined by a Sustainable Finance Advisory Committee, along with a discussion on metrics and the long-term business strategy would be included in an issuer’s SEC filings. Required disclosures related to political contributions, executive compensation, climate risk, workforce demographics and cybersecurity are also included in the proposed legislation.

Regulation could be beneficial for issuers as well as investors. ESG bond issuers already have to track, monitor and report on the use of proceeds and progress on sustainability targets, with increasing demand for third-party verifications, so standardized reporting would enhance credibility with ESG investors. Green bonds are issued to fund specific climate-related or environmental projects while sustainability bonds are issued to finance or refinance a combination of green and social projects or activities. Sustainability-linked bonds/loans are for general corporate purposes but are structured with a coupon step-up or tiered pricing based on meeting sustainability targets.

Opportunities for companies to improve operating efficiency and reputation related to ESG matters exist with more sustainable operating models and standardized reporting supports these benefits, but there are also increased costs due to both. Climate and the carbon transition are risks Fitch monitors, due to these costs.

Market access could also become a challenge for some issuers, given investor interest in ESG-friendly business and the potential re-directing of capital away from carbon intensive industries. Fitch has assigned ESG Vulnerability Scores to the utility, energy and chemicals sectors to illustrate vulnerability of creditworthiness to an ESG-focused stress scenario.

Green Bond Issuance

Green bond issuance is at a record high globally, but less than 5%, or $10.6 billion of the $270 billion, of green bonds issued globally in 2020 were by non-financial corporations in North America, based on data from the Climate Bonds Initiative. Fitch-rated companies across numerous sectors, particularly utilities, are actively issuing green and sustainable bonds this year, suggesting issuance of green bonds by North American non-financial corporations is accelerating. Georgia Power (BBB+/Negative) and Consolidated Edison Company of New York (BBB+/Negative), for example, issued bonds to fund investments in renewable projects, procurement of products and services from diverse suppliers or to finance or refinance existing and future eligible green expenditures.

Telecom company Level 3 Financing (BB/Stable) and protein processor Pilgrim’s Pride (BBB-/Stable) are examples of Fitch-rated corporates recently issuing sustainability-linked bonds. Level 3 sustainability-linked notes due 2029 have an initial coupon of 3.75% but starting 2026, the interest rate will change to 3.875% or 3.1825%, depending on whether the company has attained one of its sustainability performance targets. The coupon on Pilgrim’s Pride’s 4.25% sustainability-linked notes due 2031 steps up to 4.5% on the interest rate step up date outlined in the indenture unless it satisfies a sustainability performance target.