July 2023
Responsible Investment

SustainabilityLinked Bonds

Our assessment methodology

AXA IM is committed to the idea that investors will
be better positioned if they acknowledge andaddress climate change and sustainability in theirportfolios. This has prompted us to carefully
monitor the arrival of a new type of fixed income
asset class – Sustainability-Linked Bonds (SLBs).

What are SLBs and why
invest in them?
SLBs are different from Green, Social and Sustainability
Bonds (GSSBs), a market where we have worked toachieve a leadership position for some years now. Unlike
GSSBs, SLBs are not ‘use-of-proceeds’ instruments where
the deployment of financing received is tightly restricted
to a set of eligible projects. Just like conventional debt,
SLBs are general purpose bonds and a company canspend the money raised through the issuance as it

wishes. However, they do still represent a newopportunity to fund the climate transition and tackle
other relevant and material environmental and social
challenges. They may also have the potential to deliver
long-term, sustainable performance for our clients.
The main difference between SLBs and conventionalbonds is that SLBs integrate objectives linked toenvironmental, social and governance (ESG) factors.
According to the SLB Principles set out by theInternational Capital Market Association (ICMA) they are:“…any type of bond instrument for which the financial
and/or structural characteristics can vary depending onwhether the issuer achieves predefined Sustainability/ESG
objectives….Those objectives are (i) measured throughpredefined Key Performance Indicators (KPIs) and (ii)assessed against predefined Sustainability Performance
Targets.”1

1 Sustainability-Linked Bond Principles | ICMA, June 2023

Put simply, an SLB issuer will be financially penalised if it
fails to meet those Sustainability Performance Targets(SPTs) – and if it succeeds, will still pay the same coupon,or could be rewarded with a coupon step-down
depending on the structure. But this isn’t about
opportunistic investors hoping SLB issuers fail in theirsustainability ambitions – it is about responsible investors
like AXA IM using SLBs to incentivise companies towards
behaviour that we believe will benefit them, andinvestors, over the long term. SLB issuers effectively open
themselves up to reputational and financial risks linked totheir ability to hit sustainability objectives.
With this in mind, we think SLBs could therefore act as a
powerful tool for issuers to finance their transition
towards more sustainable business models. These
instruments are particularly relevant for high-emitting
issuers. While GSSBs focus on specific projects and assets
to be financed, SLBs establish a link between the issuer’s
ESG ambitions and the financial characteristics of thebond. An issuer’s broad sustainability strategy may
already form part of our GSSB assessment process, but it
becomes the core feature for an SLB.
We see an important issue though – there is noconsensus yet on what represents a high-quality SLB. AXA
IM has therefore decided to define a proprietary
methodology for evaluating SLBs, and we set this out
below, alongside its constituent criteria. This is an updateof the assessment methodology we published in January2022 – since then, we have gained experience andmaturity on the SLB market by looking in detail at morethan 100 different bonds.
We want to highlight that SLBs are not currently part ofour green and impact investments – where GSSBs sit –but rather of our transition investments. We consider
that SLBs and use-of-proceeds transition bonds both
relate to transition finance instruments which will allow
AXA IM to take an active role in powering that transition.

2

State of play in the SLB market
The first SLB was issued in 2019, and the market has sincegrown to reach the €300bn mark in terms of outstanding
issuance in 2023.2 Unlike the GSSB market – which isdominated by sovereigns, agencies and financials – SLBs
are most popular with corporate issuers. The utility,
materials and industrials sectors are the largest players(see charts below).
SLB issuance outstanding (in billions of euros)

The market’s development has been accompanied andboosted by improved governance and guidelines from the
ICMA. The Sustainability-Linked Bond Principles were
published in June 2020 and updated in June 2023 andhave likely helped to improve confidence in the market.
They provided guidance for SLB issuers and set out five
key components to assess:

1. Selection of Key Performance Indicators (KPIs)
2. Calibration of Sustainability Performance
Targets (SPTs)

350
300
250

3. Bond characteristics

200

4. Reporting

150

5. Verification

100
50
0

end 2020

end 2021

end 2022

2023 YTD

Source: AXA IM, Bloomberg, as of end March 2023

SLB issuers by sector (amount outstanding)
1.2%

In June 2023, the ICMA also came out with the updated
Climate Transition Finance Handbook which provides
guidelines and common expectations to issuers of SLBs,
GSSBs and transition bonds. The handbook comprises
four core elements that act as an umbrella under which
SLBs and other transition-related instrument should be
issued:1. Climate transition strategy and governance

3.8%
4.0%
4.8%

2. Business model environmental materiality

21.5%
Utilities

5.7%

Materials

7.0%

Industrials
Consumer Staples

15.9%

9.0%

3. Science-based targets and pathways to define
climate transition strategy
4. Implementation transparency

Consumer Discretionary
Financials
Energy

12.2%

15.1%

Communications
Health Care
Technology
Government

Source: AXA IM, Bloomberg, as of end March 2023

AXA IM was closely involved in the discussions that
produced these guidelines and will remain engaged infuture debates around SLBs and transition finance – justas we do for GSSBs. We are active members of the
Sustainability-Linked Bonds and Climate Transition
Finance working groups of the ICMA’s Green and Social
Bond Principles.

2 Source: AXA IM, Bloomberg, as of end March 2023

3

Importantly these guidelines around SLBs are only
voluntary and in this context, we decided to develop ourown assessment methodology as we aim to set a highbar for the SLBs in which we invest on our clients’ behalf.
Similar to the methodology we use for GSSBs, it draws on
the ICMA SLB guidelines but seeks to apply a more
stringent approach that is proprietary to AXA IM. We
have defined what we believe are strict eligibility criteriathat need to be met for us to invest. These are described
below.
Our continuous involvement in the development of the
SLB market and our pursuit of quality issuance has led to
growth in our SLB investments. As of end-March 2023, we
held more than €800m in SLBs as part of our fixed income
strategies. It is important to note that this accounts only
for SLBs that have been reviewed and validated by our
ESG research team.
AXA IM investments in SLBs (in millions of euros)
900
800
700
600
500
400
300
200
100
0
end 2021

end 2022

2023 YTD

Source: AXA IM, end-March 2023

4

Our SLB assessment
methodology

AXA IM’s SLB assessment methodology is made up offour pillars:

1. Issuer sustainability strategy and therelevance/materiality of KPIs
2. SPT ambition
3. Bond characteristics
4. SPT monitoring and reporting
For each pillar, the issuer must comply with our eligibility
criteria to be investable. We have identified a range of
red flags that systematically lead us to assign a negative
view on a given SLB. The factors outlined are intended to
be indicative and non-exhaustive. This is primarily due tothe fact that individual SLBs can vary greatly andtherefore their individual assessment involves company-

specific factors, as accepted within qualitative analysis
approaches.
It is also important to note that for repeat SLB issuers –which is quite often the case – we provide views at an SLB
framework level. This implies that our view on the issuer’s
framework would apply to all SLB instruments issued
under a given framework – unless there is a significant
difference in the structural feature of a particularbond/instrument that merits a differentiated opinion. We
believe being comfortable around the quality andambition of an SLB framework will lead us to invest only
in good quality SLBs – even though we also pay attention
to the specific features of each SLB transaction. We set
out a snapshot of our methodology in the graphic below,
and then dig deeper into the detail of each pillar over thefollowing pages.

Snapshot of AXA IM’s SLB methodology
Issuer sustainability strategy and therelevance/materiality of KPIs

SPTambition• Compliance with AXA IM’s ESG standards and policies• Sufficient ESG credentials according to AXA IM’sinternal research• Clear rationale and ambitious sustainability
strategy for SLB issuance• At least one Core KPI

Bondcharacteristics• Clear and transparent financial mechanism
to encourage SPT success and to penalise
failure to meet SPTs
• Absence of event preventing financial mechanism
from occurring• Ambitious SPTs going beyond ‘business as usual’• Concrete and detailed action plan for SPT
achievement• External confirmation of ambition

GO /
NO GO

SPT monitoring andreporting• Annual reporting on SPT progress –including explanation of potential remediation• External verification of reported progress• Timing consistency between observation dates andfinancial mechanism
Source: AXA IM

5

Pillar 1: The issuer’s sustainability strategy
and the relevance and materiality of KPIs
The first pillar assesses the issuer, not the issuance. We
want to make sure we only invest in SLBs from issuerswith a robust ESG profile and strong sustainability
ambitions.
This requires full compliance with AXA IM’s ESG Standards
and Sectorial Policies , which are applicable to all SLB and
GSSB issuers. If an issuer is non-compliant with thesestandards, it would result in the exclusion of its SLB. If
these are met, we conduct an issuer-level analysis toensure issuers are applying the basic ESG practices andforward-looking commitments deemed essential toproperly integrating and addressing key sustainability
considerations.
We apply the same approach as for GSSB issuers,
drawing on proprietary internal ESG credit and impact
research, including our qualitative ranking of thecredibility and ambition of climate ambitions, as well asa range of external research to form our view on anissuer’s relative positioning.
Once we have assessed the sustainability strategy, wethen take into consideration the first component of the
ICMA’s SLB Principles – selection of KPIs. We look at the
KPIs holistically, focusing on the quality of the set of KPIs
indicated within the issuer’s SLB framework. We take aframework-driven approach to SLB selection as we expect
an issuer to utilise all KPIs indicated within its frameworkacross its future SLB issuances.
This stems from an expectation that SLBs should be
representative of and aligned with an issuer’s overallsustainability objectives, which can be multifaceted, andthat KPIs can be complementary with some often only
meaningful when viewed together. A framework-driven
approach also recognises that there may be limitations ofa single instrument to carry a range of KPIs and SPTs.
Let’s take a hypothetical example of a utility company
issuing an SLB to illustrate that point:

Issuer’s SLB Framework
3 KPIs selected:
KPI 1: Reduction of scope 1 and 2 GHG emissions3
KPI 2: Reduction of scope 3 GHG emissions
KPI 3: Increase renewable energy installed capacity

SLB issuance #1

At framework level, we make surethat all KPIs are material to theissuer’s business model andsustainability profile, and that there
is at least one core KPISLB issuance #2

1 KPI used with 1 associated SPT:

2 KPIs used with 2 different associated SPTs:

KPI 1: Reduction of scope 1 and 2 GHG
emissions

KPI 2: Reduction of scope 3 GHG emissions

SPT: Reduce scope 1 and 2 GHG
emissions by X% by 2030

KPI 3: Increase renewable energy installed capacity

SPT: Reduce scope 3 GHG emissions by Y% by 2030
SPT: Increase renewables capacity to X GW by 2030

An issuer may pick
one or several KPIs
identified in theframework to be
used in each of its
SLB issuances

Source: AXA IM

3 Scopes 1 and 2 refer to direct emissions created by a company

through production or energy consumption. Scope 3 relates toindirect emissions up and down the value chain, from suppliers to
consumers.

6

Consequently, a pre-requisite for an SLB issuance is that
an issuer should have already established quantifiable,
forward-looking environmental and/or social goals thatare consistent with the sustainability and transition
challenges they are facing.
As stated in the ICMA principles, we expect the KPIs
selected to be material to the issuer’s business model,
quantifiable, externally verifiable, and able to bebenchmarked. Materiality is needed to avoid
opportunistic SLB issuances and greenwashing. This is a
key consideration at AXA IM and we expect an issuer tohave at least one KPI that we consider to be core to its
sector, business model and sustainability strategy within
its SLB framework.
To determine this, we may refer to ICMA’s KPI Registry,
although we have the discretion to take our own viewwhich can be particularly relevant for social KPIs. While
climate change remains a universally relevant issue, wewelcome the ability of SLBs to bring accountability to acompany’s efforts to address other sector- or geographyspecific ESG topics that may be material.

Climate Related KPIs and SPTs
Climate-related KPIs are the most widely used KPIs
in the SLB market. We have a clear preference for
KPIs referencing greenhouse gas (GHG) emissions
to be expressed in absolute terms, not intensity.
With regards to scope, we view the inclusion of a
KPI related to scope 3 indirect emissions as bestpractice. Some SLB issuers already do this, but it is
not a requirement at this stage. Our basic
expectation is that companies, including SLB issuers,
should include scope 3 in their climate reporting.
However, this does not absolve companies of a
responsibility to address their scope 3 emissions.

framework, but as GHG accounting evolves and as
the ability to meaningfully address scope 3
emissions matures at company level, we will expect
scope 3 to become part of SLB transactions. As
scope 3 represents the vast majority of issuers’ total
GHG emissions, its exclusion diminishes themateriality of an issuer’s climate ambitions andtherefore its SLB. More insights into our views on
scope 3 can be found here.

Social KPIs
In contrast to climate-related KPIs, social indicators
have thus far been much less well represented. We
hope to see that change and encourage issuers who
have already conducted materiality analyses toinclude social indicators that are material for theirsector, business model, and/or geographical context.
The disclosure of these factors in the rationale for KPI
selection help investors to evaluate whether theselect social KPIs can be considered core.
Social KPIs selected may be impactful for progress
made within the company or for external
stakeholders such as suppliers or clients. As an
example, in the case of a key transition industry suchas the automotive sector, we might expect upskilling
and/or reskilling objectives with quantified targets for
employees in keeping with a just transition approach.
For a pharmaceutical company, by contrast,
accessibility-related criteria are paramount. Eachcompany and each sector has its own specificities andthese may be reflected in the selected KPIs and SPTs
in the context of an SLB structure.

We understand the difficulties of including scope 3
emissions as a KPI or related SPT within an SLB
7

Pillar 2: SPT ambition
Our second pillar focuses on the quality and level ofambition of the SPTs and is very similar to the ICMA
principles’ second component. Although the SLB market
has matured, evaluating whether the SPTs selected byissuers are ambitious enough remains a key challenge.
We have the same expectations as the principles, whichstate that SPTs should: “Represent a material
improvement in the respective KPIs and go beyond a‘business-as-usual’ trajectory”.

medium- or long-term objectives, we also expect
issuers to provide us with intermediate targets thatmake progress trackable.
Overall, SLBs are a tool that publicly binds issuers to a
direction of travel and an ambitious endpoint. The
starting point of the issuer is taken into consideration.
AXA IM’s philosophy remains to encourage ‘best-in-class’issuers to keep progressing whilst also leaving room forthose that are not best-in-class to turn the tide.

We believe that an opinion provided by an externalverifier is a vital resource in forming that view and see
this as a pre-requisite for any SLB.
Following the principles, we also expect every SPT to becomparable against:• The issuer’s past performance (for three
years at least), and/or• Its peers’ performance, and/or• Science-based benchmark(s)In addition to the above, we may measure theambition of an SPT against industry benchmarks as wellas AXA IM’s own commitments.
Another fundamental component of the SPTs is theroadmap to attain them. We view an issuer’s actionplans as a necessary element to evaluate the relative
effort needed to achieve an SPT and therefore its
ambitiousness. We think that the achievement of SPTs
should be challenging for issuers.
As an example, we will not invest in SLBs for whichstated sustainability targets are already on the brink ofbeing achieved. We therefore expect issuers to disclose
to investors how the achievement of the SPTs willmaterialise in terms of investments, strategic direction,and potential policy changes. When selected SPTs are8

Pillar 3: Bond characteristics
Our third pillar follows the guidelines of the ICMA
principles. Here, we look at the impact of a failure – orsuccess – to achieve SPTs on the financial characteristicsof the SLB. There are many potential financial
mechanisms that can be used for an SLB – we have seen
mechanisms that actually reward issuers if they succeed,
like a coupon step-down, although it remains rare, while
the step-up penalty has become mainstream as themarket develops.
Most importantly, we expect issuers to provide fulltransparency on the financial mechanism associated withthe achievement or otherwise of an SPT, so thatinvestors are aware of the financial consequences ofsuch an event. When would the financial mechanism be
triggered? How many times would it occur until thematurity of the SLB? We also want to see timing
consistency between the financial mechanism andtrigger events related to the SPTs. Once again, in thecase of long-term SPTs, we expect issuers to establish
intermediate trigger events, as it is important to trackprogress over time.
The magnitude (size and nature) of the financial penalty is
an important and distinguishing parameter of an SLB
structure. It is not, however, an overriding or exclusionary
criteria in the SLB analysis conducted by our ESG researchteam. We do not currently have a prescriptive view on
the structure and size a financial penalty should take –beyond our belief that there should not be a standard
and universal penalty applied across the market.
Rather, we are of the view that that the financial
mechanism’s magnitude should be assessed relative tothe issuer’s sector, ratings and currency. Although simple
in principle, timing constraints of SLB transactions can still
make it difficult to have a clear view on this. Hence, while
important, it is not currently a prevailing factor for our
SLB opinion.

We do however pay close attention to events andmechanisms that could prevent the financial penalty from
actually occurring – e.g. an SLB that can be called before
the target observation date. In our view, suchmechanisms (or loopholes) adversely affect the credibilityof an SLB, and we consider them a red flag which would
result in exclusion.

Pillar 4: SPT monitoring and reporting
The last pillar of our methodology relates to updates on
SPT progress through regular reporting from SLB issuers.
While the ICMA principles only encourage issuers topublish SLB reporting, it is mandatory within ourassessment. We will not invest in SLBs where the issuer
does not commit to publish annual reporting –conversely, we may also change our views if an issuer
does not actually publish SLB reporting post-issuance.
We expect SLB issuers to make publicly available
information on the progress they have made to achieve
an identified sustainability target – and for each SPT if
several are used. Any additional information about
qualitative or quantitative explanation of progress on
SPTs, and/or potential recalibration of KPIs and SPTs, isalso expected. As stated in the principles, SLB reportingmust be externally verified by a third party.
After looking at what has been done so far in the SLB
market in terms of reporting, we realise that this can bedone in various ways. It is sometimes quite difficult toaccess relevant information related to the selected KPIs
and SPTs when such data is diluted into a broadsustainability report. The same is valid for external
review, where investors may struggle to distinguishwhether the verification specifically relates to the SLB or
to the overall sustainability metrics of the issuer.
For the sake of greater transparency and clarity of
information, our preference is for separated SLB
reporting and an external review, but the format ofreporting is not a discriminatory criterion – once issuers
do publish updates on progress made.
9Engaging with SLB issuers
and market players

Engagement with bond issuers is an important aspect of
our active ownership, as we are long-term investors andoften hold bonds to maturity. Engaging on ESG issues is a
critical way to ensure we manage the value of our bondinvestments over time.
Having direct discussions with SLB issuers is a great way
to monitor the robustness and ambition of theirsustainability strategies – as well as the quality of their
SLB framework. We engaged with 21 SLB issuers in 2022,
which allowed us to better identify good practices andclarify our expectations with this market. Engagement isa key aspect of our SLB assessment process, and wehave direct dialogue with issuers whenever we can for
SLBs in which we may invest. We believe this is essential
to get all the information we need to make acomprehensive analysis and go beyond issuers’ SLB
frameworks and public disclosure.
Another way we seek to influence the SLB markets is byhaving regular discussions with underwriting banks. We
often have these kinds of discussions to share oureligibility criteria for SLBs, our views on specific deals or
our broader ESG expectations for issuers. We believe it isa very effective way to spread our views andexpectations across the market, as banks can share ourthoughts with their broad base of clients on the issuers’
side. This kind of indirect engagement with SLB issuers
can allow for our feedback and expectations to be taken
into consideration within issuers’ SLB frameworks and/or
sustainability strategies even before these are officiallypublished.

10

Looking forward: Our vision for the SLB
and transition finance market
This remains a nascent market, just four years on fromthe first SLB issuance. Standards are still being formed,
but we remain convinced of the potential for high-quality
SLBs to foster and support company-level transformation.
We believe a growing number of issuers from a wide
range of sectors will continue to see SLBs as an appealing
option. As investors, we view SLBs as a complementary
instrument to use-of-proceeds instruments, in the ESGthemed bond space. Both formats have their own merits
and functions, enabling investors to participate acrossthe spectrum of the climate transition as well as in theattainment of the United Nations Sustainable
Development Goals. We also believe that SLBs can beparticularly attractive, and appropriate, for emerging
market issuers as they seek to establish their transition
credentials.
At AXA IM, SLBs are considered transition investments –as is the case for use-of-proceeds transition bonds –while GSSBs remain part of our impact investments. Even
if SLBs seem to have taken the lead over transition bonds
when it comes to transition finance, we still believe there
is a place for use-of-proceeds transition bonds. As issuers
accelerate their sustainability journeys, they will need toaccess a range of instruments that are suitable for theirsector, for the nature of their projects, and for the typeof spending they need to finance.
As the SLB market has grown, so has our understandingof the kinds of SLB structures that we appreciate. We see
strong benefits of an SLB and use-of-proceeds format –whether GSSB or transition – being combined in thesame product. We have seen a few transactions that
mixed well-defined and targeted green projects withfinancial characteristics that were linked to theachievement of sustainability targets at issuer level. In
our view, this hybrid format amplifies the message andcould serve to strengthen issuers’ sustainability
ambitions.

“

AXA IM iscommitted tohelping improvestandards in thismarket”Thus far, the unique characteristic of the SLB market has
not yet been thoroughly or consistently tested. Only aminority of SPTs have had target observation dates thathave come to pass. Hence, the ways in which investors
should perceive and react to an SPT failure is still thesubject of debate.
At AXA IM, we are of the view that a failure to meet an
SPT does not necessarily call into question the credibilityof the SLB market. Rather, it could attest to the level ofambition in the SPTs and may reflect extenuating
circumstances that could build our understanding of how
this market may evolve. What remains important for us as
investors is to know both what led to a failure and, more
importantly, what remediation measures are in place toensure an issuer can still meet any longer-term targets orcontinue in the direction of the objectives.
Overall, AXA IM is committed to helping improvestandards in this market. We aim to promote quality andintegrity across the GSSB, SLB and transition bonds
markets, which we hope will pave the way for moreissuance, more take-up by investors, and ultimately abeneficial impact on people and the planet.

11Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis
relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of
AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, andshould not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment
strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective andsubject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations,analysis, predictions and other information in this document is provided based on our state of knowledge at the timeof creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third
parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.
Reliance upon information in this material is at the sole discretion of the recipient. This material does not containsufficient information to support an investment decision.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct
Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N
4BQ.
In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
Image source: Getty Images

12