Jacobs (NYSE:J) has included Scope 3 emissions reduction targets in its latest sustainability-linked bonds (SLBs) issuance. The initiative will invite scrutiny, but the firm’s ability to achieve its goal may also revive issuance in the asset class, which has been declining.
- Jacobs, a US-based technical professional services firm, has issued $500 million in SLBs, including Scope 3 emissions in its key performance indicators (KPIs).
- SLB issuers have been scrutinised of late for setting unchallenging KPIs, prompting scepticism over whether the asset class can meaningfully support sustainability goals.
- The initiative may set a precedent and revive the outlook for SLBs, which S&P deems to be at an inflexion point, although the timings of Jacobs’ targets may raise concerns over the validity of its KPI.
SLB volumes declined substantially in 2022 after a 21% increase in issuance in the first half, finishing the year 25% below 2021 levels. This was due to increased scepticism about the credibility of the sustainability targets established by the asset class, as well as issuers being concerned about greenwash claims.
For example, advocacy group Mighty Earth complained to the US Securities and Exchange Commission accusing meat producer JBS (BVMF:JBSS3) of greenwash. This was because it issued four SLBs with KPIs that were not tied to total emissions reductions nor refer to its Scope 3 emissions, which account for 97% of the company’s footprint.
According to rating agency S&P, in order for SLBs to resume their prior growth trajectory, issuers need to resolve concerns about the credibility of KPIs, even though it may invite scrutiny of their sustainability targets. SLBs are considered an ideal tool to finance the transition for hard-to-abate sectors such as energy, cement and metals and mining.
What KPIs has Jacobs included in its SLB framework?
Jacobs has issued 10-year SLBs worth $500 million. In accordance with SLB principles, it has also issued a bond framework which lists the KPIs which will determine the final cost or interest rate paid by the company.
The first KPI relates to reducing greenhouse gas (GHG) emissions. Jacobs has made targeting climate risk a key part of its climate action plan, climate response one of three core growth accelerators in its 2022-24 company strategy.
The company previously established GHG emission reduction targets that have been approved by the Science Based Target Initiative (SBTi), and committed to reducing its absolute Scope 1, 2 and 3 emissions by 90% by 2040, compared to 2019 levels. It also set interim GHG reduction targets which are SBTi approved and aligned with a 1.5°C pathway.
By 2030, the company intends to reduce its Scope 1 and 2 emissions by 50%, while reducing Scope 3 emissions from business travel and employee commuting by 50%, which contributed to the majority of its Scope 3 emissions according to internal estimates.
As part of its GHG emissions reduction KPI, Jacobs also committed to having science-based targets for 65% of its suppliers by 2025, based on its spending on purchased goods and services. This will be a key step in helping decarbonise its supply chain and reducing its Scope 3 emissions.
A second KPI refers to diversity and inclusion (DEI), which is stated as the “Representation of self-identified females in the VP and above levels”. Jacobs plans to use self-reported diversity data to identify women in the vice president (VP) and above designations, to be measured as of the last day of the end of the fiscal year ending in 2027.
As of the end of September 2022, women occupied 28% of the roles identified as VP and above, including senior vice president, executive vice president and chief executive officer. Jacobs said these roles are significantly impacting performance and driving its strategy.
Its gender representation target is 40:40:20 across all of its businesses by 2025, which means its workforce will ideally be represented by 40% men, 40% women and 20% people of any other gender. This is not part of the SLB KPI, however.
Do Jacobs’ KPIs seem achievable?
A question arising is how Jacobs’ progress in achieving its goals will be measured to determine the final interest payments on the SLBs. In general, bondholders do not provide discounts, so performance against KPIs is important for issuers to ensure they do not pay a penalty.
Jacobs’ bond has a 10-year term, meaning it matures in 2033, and its GHG reduction goal of 90% across its Scope 1, 2 and 3 is set for 2040, although it has also set an interim goal of 50% reductions by 2030, both on 2019 levels.
Based on the company’s estimates, it has already achieved an over 50% reduction in its overall Scope 3 emissions between 2019 and 2022, suggesting that the 2030 goal may not just be achievable, but also not particularly challenging. A further 40% reduction until 2040, therefore, seems likely. Total 2022 emissions (Scope 1, 2 and 3) are already estimated to be down more than 61% since 2019.
The KPI relating to its DEI goals also appears achievable, considering the current 28% female representation in roles designated as VP and higher.
How does setting credible KPIs impact the outlook for SLBs?
As SLB proceeds are eligible for general corporate purposes, the use of proceeds is not confined to a specific green project with clearly identified sustainable objectives. Explaining the credibility of their sustainability or transition strategy, and how it relates to the SLB, is left up to the issuer.
A further reason for the drop-off in SLBs stems from their use by non-financial companies, which have accounted for about 90% of their issuance thus far. SLBs give companies in hard-to-abate sectors access to sustainable financing and flexibility in using the proceeds, which would otherwise make issuing green or social instruments difficult.
As a professional services consultancy, Jacobs’ GHG emissions are not expected to be high. Yet, by setting KPIs that look at the total scope of its GHG emissions, and by providing transparency against its overall decarbonisation goals that extend beyond the maturity of the SLB, it is setting a good example for its clients to follow.
Serving a diverse range of sectors across the US and globally, the company has the opportunity to introduce best practices to its clients, not just in design and strategy, but also in governance and sustainability.
By establishing credible targets in SLB KPIs, maintaining integrity through transparent reporting, and following through by achieving its stated goals, Jacobs can serve as an example of good SLB issuance. This may help revive the sector and provide much-needed finance to enable the transition to a low-carbon economy.