Chanel Sustainable Bonds Miss the Mark
Two years ago Chanel issued a Sustainable Linked Bond that associated interest cost to hitting certain milestones. When they issued the bond, they were weeks away from finalizing their climate metrics for 2-18, so they had to tie everything to 2018. Post issuance, it became clear that Chanel’s “targets” were actually already partially hit as of 2019. Chanel has successfully navigated the financial markets and climate warriors. Flash forward to 2022, when the interim targets are supposed to be met and Chanel is coming up short.
Sustainable Linked Bonds are meant to give corporations a mechanism to ‘put their money where there mouth is’ and tie commitments to financing costs. In theory, a step in the right direction, but these loans are covenant light and the penalty is often near deminimus. Further, the companies can play games like Chanel and all but guarantee hitting the milestones by using stale metrics. To investors, Chanel missing the interim target does not lead to financial penalty, but it sets the stage for a 2025 miss if they don’t course correct. As we near the deadlines on these bonds, there will be opportunities to ‘bet’ on which operators will and will not be able to hit their targets.