ESG (environmental, social and governance) has been one of the “hot topics” of interest among investors, financial markets and the public at large. Operating sustainably is proving to be not a trend, but a reality that companies must assimilate in the current society. The environmental portion of the ESG agenda has been pushed the hardest by companies, financial institutions, investors and regulators, with advanced discussions in Europe and the March 2022 proposed rules on climate change disclosure by the United States Securities and Exchange Commission (SEC). Sustainable initiatives can – and should – also be used to help bridge the gender gap in the corporate world. While sustainable investing has been growing in recent years, investing focused on gender equality has fallen short of other ESG agendas, despite need for improvement.
Companies have increasingly utilized instruments of sustainable finance, such as bonds and loans, to advance ESG-related commitments. Sustainable finance incorporates instruments of climate, green and social finance that can be used to advance sustainable goals. These can include so-called “use of proceeds” bonds (such as sustainability, green or social bonds), which earmark funds for predetermined projects, as well as sustainability-linked bonds (“SLBs”), further explained below.
According to the International Capital Market Association’s (“ICMA”) Sustainability-linked Bond Principles (“SLBP”), SLBs are bond instruments with financial and/or structural characteristics that depend on whether the issuer achieves predefined ESG objectives, called Key Performance Indicators (“KPIs”). KPIs are assessed according to preset Sustainability Performance Targets (“SPTs”) and verified and reported throughout the duration of the bond.
The main difference between sustainability bonds and SLBs lies in that the latter are not tied to any specific project and do not require earmarking of the issuance’s funds. SLBs are rather performance-based instruments, tied to the issuer’s business as a whole and ability to achieve certain ESG goals. Therefore, in a sustainability-linked transaction, an issuer is encouraged to select KPIs that are truly material and reflect its values as a business. In fact, ICMA’s SLBP recommend that issuers publicly communicate their rationale for the selection of the KPIs, and that such KPIs should be relevant, core and material to the overall business, and of high strategic significance to current and/or future operations. Likewise, the selected SPTs should represent a material improvement in the issuer’s KPIs and be consistent with their overall strategic ESG strategy.
Instruments such as SLBs can shift the typical relationship between issuers and investors by focusing on accelerating organization change to advance social impact, in addition to the usual financial reporting presented to the market. They can also offer an opportunity to demonstrate leadership in advancing gender equality by integrating gender objectives into bond frameworks. Such transactions offer an excellent tool for issuers to advance gender equality within their structure.
As an example, Suzano S.A, one of the world’s largest pulp and paper producers based out of Brazil, has been taking advantage of SLBs to push its ESG commitments in recent years. In 2020, it issued one of the very first SLBs ever seen – and the first public SLB offering registered with the SEC – and in 2021 it added a gender-based KPI to their framework. According to Suzano’s June 2021 Sustainability-Linked Securities Framework, one of its sustainability strategy’s priorities is to have 30% women and 30% Black employees in leadership positions by 2025. Senior management variable compensation has incorporated the company’s long-term targets as “skin in the game” incentives for working towards these goals.
Accordingly, Suzano set a gender equality KPI with a goal to reach 30% of women in leadership positions by 2025. The rationale includes boosting creativity, innovation and generation of results through diversity and creating an inviting environment to incentivize employee retention and engagement. It is also relevant to note that the baseline for the KPI is 16% of women in leadership positions in 2019, representing a material increase. As another commitment to material change, the KPI covers leadership positions, meaning positions no more than three levels below (and including) the Chief Executive Officer, such as managers, executive managers, directors and executive officers – meaning strategic positions in the company. Suzano benchmarked the KPI against three peers and argued their goals to be ambitious in comparison with others, such as percentage of women in new hires (vs. leadership positions) and longer timelines (e.g., 2030). Another interesting point is that the KPI considers women under the vision of gender identity – in other words, employees who identify themselves as women. It considers the internal and individual experience of gender felt by each person, regardless of sex assigned at birth and including other expressions of gender such as dress, speech and mannerisms. With this, Suzano also takes a progressive step in openly recognizing and embracing transgender employees, fostering an inclusive environment.
Based on its June 2021 framework, Suzano issued two series of SLBs containing the above-mentioned gender KPI, raising US$1 billion in 3.125% Notes due 2032 and US$500 million in 2.500% Notes due 2028. For each series, there will be a step-up of 25.0 basis points if Suzano is unable to reach the agreed threshold of women in leadership positions by 2025. Both transactions were a great success among investors, having priced at the lowest coupons in the company’s debt securities history.
This shows companies have a lot to gain by investing in material gender equality commitments. Institutional investors are eager for more sustainable investments and increasingly look into companies’ ability to incorporate material ESG commitments into their strategy. For US companies, proxy advisory firms will likewise take into consideration the composition and diversity of board members when recommending proxy statements and proposals, while also valuing a diverse and engaged workforce and disclosure on workforce diversity. It is also worth mentioning Nasdaq’s new listing rules regarding board diversity and disclosure approved by the SEC in 2021 as an example that stock exchanges will also value initiatives towards gender equality.
The discussions around sustainable finance should aim to push forward the gender inclusion agenda in addition to green investments. As companies navigate through a sustainable future, they should not overlook the topic of diversity and inclusion, especially as they intend to enter international capital markets. It has become clear that financing instruments such as SLBs present great opportunities to advance such goals, and the market welcomes them.
1. UK Government, GenderSmart, IISD (International Institute for Sustainable Development), Kite Insights. 2022. Integrating Gender Considerations into Sustainable Bonds. GenderSmart and partners: 2022. See https://static1.squarespace.com/static/6089294d7cb43b4cffb93591/t/621cbb297e85c74fcd29147a/1646050111342/Integrating+Gender+Considerations+into+Sustainable+Bonds+(1).pdf.
2.For further information on ICMA Sustainable Finance definitions, see: https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Sustainable-Finance-High-Level-Definitions-May-2020-051020.pdf.
4. For instance, the structure of the sustainability-linked bond can provide for a step-up on the bond’s coupon rate if KPIs are not met, and the issuer must pay a premium to the investors, which is the most common structure. Inversely, the structure can also provide for a step-down, decreasing the coupon rate if KPIs are met before maturity.
5.ICMA (International Capital Market Association). 2020. Sustainability-Linked Bond Principles Voluntary Process Guidelines. June 2020. Zurich: ICMA. https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Sustainability-Linked-Bond-Principles-June-2020-171120.pdf, p. 3.
6. ICMA (International Capital Market Association), UNW (UN Women), IFC (International Finance Corporation). 2021. Bonds to Bridge the Gender Gap: A Practitioner’s Guide to Using Sustainable Debt for Gender Equality. Washington, DC: IFC. See https://www.ifc.org/wps/wcm/connect/05aca7eb-6e85-4296-8b27-f8c75c7107d4/Bonds+to+Bridge+the+Gender+Gap.pdf?MOD=AJPERES&CVID=nQl1OB1.
7. GenderSmart’s Climate & Gender Investment Working Group, IISD and the ASEAn Low Carbon Energy Program have analyzed a few examples of private companies that have started to incorporate gender into their sustainability-linked bonds framework, such as Schneider Electric, a French energy company that issued bonds in 2020 with a KPI related to certain thresholds of women among new hires, front-line managers and leadership, and Enbridge, a US energy infrastructure company that issued bonds in 2021with a KPI related to representation of women in its Board of Directors. See https://static1.squarespace.com/static/6089294d7cb43b4cffb93591/t/621cbb297e85c74fcd29147a/1646050111342/Integrating+Gender+Considerations+into+Sustainable+Bonds+(1).pdf.
11.Glass Lewis. 2022. 2022 Policy Guidelines.
12.Glass Lewis. 2022. 2022 Policy Guidelines – Environmental, Social & Governance Initiatives. Cleary represented Suzano in these offerings
About the autor:
Luisa Franciss Galliez’s is Associate in Cleary Gottlieb, her practice focuses on corporate and financial transactions, particularly in Latin American capital markets. Luisa also has experience in project finance and infrastructure matters. Prior to working with Cleary, Luisa worked at the entity responsible for self-regulating the Brazilian securities market. Luisa joined the firm in 2016.