Tesco’s ethical bond will not help the planet much

As world leaders struggle this week to limit dangerous global warming, there is no shortage of investors willing to fund companies doing so.

The problem is some firms are taking the money in exchange for soft targets to reduce emissions, which they can easily meet. A case in point: the UK’s largest grocery chain Tesco.

After its first sustainability-linked bond in January was criticised for using an emissions goal it had largely achieved, the firm has issued more debt linked to the same target, which covers the reduction of a tiny proportion of its total carbon footprint. Investors lapped it up, bidding more than three times the amount on offer to reduce Tesco’s borrowing costs, but the benefits to the environment look minimal.

That feeds a wider concern that the trillions in funds now flowing into environmental, social and governance assets provide little impact on emissions reductions. It mirrors fears by activists that leaders, meeting for a climate summit in Glasgow, are pledging future targets while taking little action to stop actual emissions from continuing to rise.

“It might be plausible for a company to issue unambitious or ‘lazy’ sustainability-linked bonds that do not tangibly promote the company’s sustainability goals,” said Jamie Irvine, a London-based investment manager at investment company abrdn, who sees Tesco easily on track to hit its limited emissions goal. “These structures should not simply be an easy way for issuers to access cheaper financing from unwitting investors.”

Climate accounting

The £400m bond is linked to Tesco’s goal to reduce scope 1 and 2 emissions — its direct output from things such as energy use in its stores — by 60% by 2025 from a 2015 baseline. That target is over 90% complete, according to Tesco’s report to environmental disclosure organisation CDP, and does not cover scope 3 emissions from its supply chain and the use of its products, which represent the vast majority of its emissions.

Tesco declined to comment. In a press release, it said the note is aligned to its sustainability-bond framework, which follows voluntary principles set out by the International Capital Market Association and is independently assessed by Sustainalytics. The bond “further cements our ambition” to be net-zero in operations by 2035, said CFO Imran Nawaz.

The new bond’s use of an easy target comes despite the fact Tesco has stronger climate goals. Its net-zero target, approved by the standard-setting science-based targets initiative, also covers its scope 3 emissions — which are harder to calculate than direct emissions — and it is working with suppliers to reduce their carbon footprint.

The bond demand shows the rush to grab anything with an ethical label. Sales of such debt have surged to a record 25% of the €1.5-trillion of public deals in Europe so far this year. The big orders have helped companies achieve better pricing, though signs are emerging that some activist investors are getting more picky about controversial green debt.

The clamour for Tesco’s latest bond allowed the grocer to price the deal at a spread of 110 basis points over UK government bonds, which was 25 basis points tighter than initial marketing. In its first venture into the sustainability-linked market in January, it sold a €750m bond, leading Jupiter Asset Management’s head of environmental solutions and others to question the credibility of this asset type.

Even so, since then the use of sustainability-linked debt has exploded around the world, helping drive total ESG bond sales towards a record $1-trillion this year.

Bloomberg News. More stories like this are available on bloomberg.com