Koninklijke KPN, the Dutch telecoms company, picked the most challenging of all emission sources to tie to its debut sustainability-linked bond on Monday, as it looks to become net zero across all three emissions Scopes by 2040.
The issuer, rated Baa3/BBB/BBB, opened books on its 12 year (November 2033) sustainability-linked bond at 100bp over mid-swaps for an expected €500m. Barclays, BNP Paribas, Deutsche Bank, ING and SMBC Nikko ran the trade.
KPN took the unusual step of focusing on Scope 3 emissions; those created indirectly from business operations. Scopes 1 and 2 are more often chosen for KPIs in SLBs, but KPN is already climate-neutral on those metrics. KPN is the first SLB issuer from the telecoms sector although Deutsche Telekom has published a sustainability-linked framework.
“Scope 3 emissions in our value chain represent the majority of KPN’s total emissions and therefore we have selected this as the single KPI in our framework,” said Jan-Maarten van Osch, vice-president, corporate treasury, at KPN. “In our view, Scope 3 emissions are material to a sustainability and business strategy.”
Scope 3 emissions are seen as the most difficult to tackle, as a company has the least control over them. The greenhouse gas emissions of suppliers and customers fall under Scope 3 emissions.
Cutting by 30%
In particular, KPN needs to cut its Scope 3 emissions by 30% by 2030 against a 2014 baseline. If it does not, the coupon on the notes will rise by 37.5bp from November 2031 until maturity. This is higher than the 25bp increase that many see as industry standard. “Investors don’t care that much,” said a lead. “But it optically looks better.”
This means that rather than change its own practices, KPN must put pressure on other entities to change theirs.
“We engage with suppliers in the carbon reduction value chain,” said Jeroen Cox, strategic lead, energy and environment, at KPN, who added that the company’s Scope 3 emissions targets had been approved by the Science-Based Targets Initiative. “This year we increased our ambition to become net zero for Scopes 1, 2 and 3 by 2040.”
Investors liked the deal enough for KPN to increase it from an expected €500m to €700m and price it at 77bp over mid-swaps. Fair value was somewhere around 75bp over mid-swaps. The main reference point was KPN’s 2032s, spotted in the mid-70s.
“They saved 2bp with the sustainability-linked structure,” said the banker at one of the leads.
Nonetheless, the book was lacklustre, ending at €1.1bn, having passed €1.5bn earlier in the process.
“It’s not a credit story for everybody,” said the banker, in reference to the company having been targeted for leveraged buyouts in the last year. “People won’t just buy it for the sake of it, which is reflected in the final book size.”
