1. Your research on SLBs looks at motivations behind the prevalence of sustainability-linked bonds, such as ‘greeniums’ (**the amount by which the yield on the green instrument is lower, compared with the conventional instrument). Could you share some of your findings?

Initially, we found a greenium of 30bps when you match SLBs with a counterfactual plain vanilla bond by the same issuer. Inevitably, there is an issue with bonds being issued at different times. In our new working paper, we controlled for changes in the credit and interest rate environment and found that the greenium prevails. However, on average it is smaller. The most interesting thing we found was that there was strong evidence of a greenium for 2021 SLB issuances but by 2022 it had disappeared. There could be multiple reasons for this, one of them being that the market in 2022 was very different, with both inflation and the Ukraine war.

2. Can you discuss the role of callability within SLBs? Are there ways to reduce refi risk?

Callability in an SLB is potentially a problem if you can call the bond and thereby avoid paying the penalty for failing to achieve the sustainable performance target. It seems most SLB issuers are now taking care of this risk by making provisions in the definition of the call option that you need to compensate depending on the target status. There are exceptions where this isn’t the case but that is an omission and is not ideal. Ultimately, this was a growing pain that was initially missed.

In the first version of the SLB working paper, we found that callable bonds had a higher greenium and statistically this is still true in our updated version. However, we have found that callable bonds tend to be European bonds, so we are not sure if the higher greenium was a result of the callable feature or geographically driven. With more data, we could disentangle this.

3. How is SLB pricing affected by the size of the penalty or step-up?

The greenium does not respond to the size of the actual penalty. This is quite odd from a rational pricing perspective. You could make the case that there is a way to price the step-up as an embedded option. For example, you would think about what the penalty is and the likelihood of getting that penalty. However, the greenium at issue is often larger than the maximum potential penalty. I believe that there is an additional effect from the demand for green securities which may be the primary driver for SLB pricing.

4. Do you think the reason for the 2022 decline in SLB issuance (as a percentage of total issuances) was partially due to greenwashing concerns?

The drop in issuance could be because after the initial excitement around SLBs there was a coming down-to-earth moment and a realisation that the devil is in the detail. One of the takeaways I have had from speaking to people is that there should be a simple structure of one target - one step up. Likewise, it’s important that the target is central to what the company is doing and not peripheral to its operations. I think a focused and singular target is a good thing that makes an instrument more credible.

5. We have found lots of issues surrounding the ambitiousness/appropriateness of SLB’s KPIs/SPTs. How do green-bonds (use of proceeds) compare to sustainability-linked instruments in driving impact?

From the perspective of wanting to drive change, green bonds are a very strange concept and I am more sceptical of them because they don’t necessarily lead to new green projects. In my opinion, SLBs are more ambitious. There is a target in the future that you agree on. There are problems in the details, but in principle, the idea behind them is good for driving change.

Green bonds are attractive to issuers who already have lots of green projects, however, they can be quite costly in terms of documentation. SLBs are attractive if you are at the beginning of establishing green projects. In terms of documentation, SLBs are also easier as you are reporting fewer KPIs.

6. You have been an author on multiple papers examining ESG scoring. In one of your papers, you found significant discrepancies between the scores of different rating agencies (0.31 to 0.71 correlation). How useful do you think ESG scores are in choosing sustainable investments and advertising sustainability-related credentials?

While we find ESG ratings diverge, the wrong conclusion is that they contain useless information. The point of the paper is to show why they diverge. The first is diversity in how you measure factors like working accidents, emissions, and water consumption. That is an important reason why there is divergence and confusion. Another aspect is what are you trying to figure out by using a score. There are two main goals: materiality and impact. Depending on what you want to emphasise it is very natural that you will come out with different scores.

What is wrong is to use a score that’s based on materiality and use it to show that you have a sustainable portfolio in terms of impact. Standardisation is difficult but clarity on what you are trying to measure should be simple enough; you just need to be open and honest about what you are measuring.

7. 9fin’s ESG team has encountered examples of companies incorrectly reporting ESG data or purposely disclosing misleading data. As ESG disclosures become mandatory do you think data quality and scoring will improve?

It will improve with regulation, as when it's mandatory and you put out the wrong data you can get sued and companies will try to avoid that. If you cannot get sued and you can gain an advantage by disclosing incorrect data, this can be attractive, except when there are reputational concerns. I would guess that this is more prevalent amongst smaller companies, as large companies would actively avoid this bad publicity.

The use of bad data is a weakness of scoring. But it's also important to look beyond corporate disclosures. It’s like in high school, where if you say “I’m good in bed” nobody believes you, but if others say it's true, it probably is. The same goes for corporate responsibility. I like data sets that include media reporting, local NGOs’ perspectives, and what customers say.

8. You were involved in a paper that found a positive relationship between a company’s ESG rating and its financial performance. Could you provide some insights on this relationship?

Inherent in the question of how an ESG rating affects financial returns, is how do you measure ESG performance. In the paper, we use multiple ESG ratings to get at the true effect of ESG. The measurement problem is one reason why it is so hard to understand the relationship between ESG and financial returns.

You can think of the relationship as two channels. The first and most widely accepted is the effect of demand in financial markets. That a bunch of money has been flowing into ESG securities over the past decade has helped them perform. However, if ESG demand stabilises or goes backwards this will go into reverse. The other channel is through fundamentals; a company that has good employee relations is possibly more profitable.

9. Last year ESG received significant criticism from media outlets, investment funds, and US government officials. Have you seen a changing attitude towards ESG in recent years?

A lot of this backlash is coming from the US where everything is polarised. Now ESG has been pulled into the US polarisation maelstrom. On balance, this doesn’t do a lot of good as the arguments become flat. On the other hand, it does lead to greater scrutiny. There definitely was hot air in ESG as it was gearing up in 2021. There should be a greater focus on detail and quality. What I would hope is that people do not just become pro and anti-ESG.