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Sustainability-Linked Bonds: Green Progress or Greenwashing?

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In February, TUI, one of the world’s largest tourism businesses, announced it would be offering sustainability-linked bonds.

TUI’s promise to investors: Loan us money, we’ll pay it back at a competitive interest rate and hit a stated ESG goal for lowering emissions. If we miss the goal, that interest rate goes up and you make more money.

The company hoped to sell about $318 million worth of the bonds, but there was plenty of demand and the total value hit $530 million. 

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Why It Matters

On paper, it seems like a win all around. For TUI, for investors, and for the environment. 

But it’s not that simple. Sustainability-linked bonds are a new instrument and they haven’t been fully tested. There are still questions about how these goals are measured and regulated. In TUI’s case, scientists say that the goals will be tough to meet by its deadline.  

“When they came out, I was thinking, Oh here goes another greenwashing episode of sustainable investing coming down the pike,” said Leslie Samuelrich, the president of Green Century Funds, an environmental mutual fund that helps investors make sustainable financial decisions. 

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Environmental and social bonds have surged in recent years, with sales hitting more than $1 trillion dollars in 2023. Sustainability-linked bonds are one of four types, and they make up the smallest percentage of that total. In 2023, they had the largest decrease in sales volumes, down 22% to just $68 billion. 

Because SLBs are still in their infancy, there isn’t a track for how effective these bonds are, how effective they will be, or how many companies reach their targets.

“This is a very new market,” said Alan Xiangrui Meng, the sustainable fixed-income research lead at the London Stock Exchange Group. “The first one was only issued in 2019, so 2025 is the year that SLBs will be tested.”

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What Are Sustainability-Linked Bonds? 

Sustainability-linked bonds are the younger cousin of green bonds, a more well-known and widely used investment that earmarks funds for specific environmental and climate-related projects. 

An example might be an electricity company that issues a bond to raise money for a factory that produces solar panels. 

Sustainability-linked bonds offer more flexibility. Rather than linking them to specific green projects, these bonds are tied to overall targets that companies decide for themselves. 

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However, some climate finance experts are skeptical about SLBs. They are concerned that the money raised in a bond offering doesn’t have to go to green projects, and that companies could just roll back their efforts after the target is reached. 

“When they meet the goal, they can do whatever they want with the proceeds,” said Samuelrich.

How Will TUI’s Bonds Work?

TUI’s recent bonds are linked to its airline division, which is responsible for 70% of the company’s total greenhouse gas emissions.

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The benchmark is the amount of carbon dioxide equivalent emissions produced per kilometer traveled by a passenger. TUI promises to reduce those emissions by at least 11% by September 30, 2026 versus 2019 levels.

If TUI hits the target, the bonds pay 5.875%. If it misses, the rate rises to 6.15%. 

TUI also has a goal of reducing emissions by 24% by 2030, but since the bonds will mature in 2029, it only has to reach the 2026 reduction target to avoid the penalty.

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One global investment firm, AllianceBernstein, which bought one of TUI’s bonds, told Skift it was impressed by the 2030 target, but had felt that the 2026 target was “a touch less ambitious.” 

“Overall, it shows that they’re moving in the right direction,” said Patrick O’Connell, director of responsible investing research in fixed income at AllianceBernstein. “For this specific bond, I think there’s some confidence that they will be able to reach this target. But SLBs are still the Wild West…inherently any time you’re forecasting about the future, there’s uncertainty.”

O’Connell says that there has been a lot of skepticism and scrutiny of companies that issue ESG-based sustainability-linked bonds. “SLBs can bring undue attention to a company who is potentially doing greenwashing,” he says. But AllianceBernstein suggests that TUI has not been mired in any related controversies and has faith in their intentions. “TUI is definitely not in that greenwashing category,” says O’Connell.

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TUI’s spokesperson said that it doesn’t have specific plans to use these funds directly for sustainability purposes, but that sustainability is an “integral part of [its] business strategy” and that the bonds will therefore “indirectly also benefit sustainability purposes.”

Samuelrich says that the increased amount that TUI would have to pay should they not achieve their goals on this bond isn’t particularly high. 

“There’s a lot of talk about how companies will just issue the bond and calculate the step-up costs,” she says. “They will pay the step-up costs as part of doing business.” 

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How Will TUI Reach Its Goals?

TUI will focus on three methods to reduce emissions:

  • Using the most modern engines to save fuel.
  • Implementing a technology called SITA Opticlimb that leverages historical flight data to help airlines optimize their climb.
  • Partnering with Sustainable Aviation Fuel (SAF) producers.

TUI will not be using offsets to achieve this target, a TUI spokesperson said. 

Scientists Skift spoke to for this story hadn’t heard of SITA Opticlimb. It is a relatively new resource in the industry. SAF is also still in very early days, with volumes amounting to just 0.2% of all aviation fuel in 2023. 

TUI said it is in an early phase with SAF and focusing on testing small amounts of the fuel. “We will increase these amounts step by step and are working on further agreements with SAF suppliers,” said TUI’s spokesperson. “All our plans for the reduction of emissions in the airline take this approach into account and we are on track, according to our plan for emission reduction.”

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The company has also committed to including Scope 3 emissions in these reductions, which refer to emissions at every stage of the supply chain and tend to be the hardest to track.

But some experts don’t see SAF as a feasible solution for the near term. “It is not scalable on that timeline,” said Volker Sick, a professor of mechanical engineering at the University of Michigan and an expert in deploying CO2-utilization technologies for infrastructure and manufacturing. “We don’t even have enough carbon-free electricity to make it.” 

Sick says that there are many different “admirable” routes to making SAF, but that in the best case scenario, we will see a 10% market penetration by 2050. 

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When it comes to TUI’s Scope 3 commitments, there are also a lot of questions about how SAF is made and whether the production processes are carbon neutral. “It’s very admirable that they’re trying to reduce their carbon,” said Samuelrich. “But if biofuels are part of this scheme, there are some biofuels that are driven by agricultural commodities and…associated with deforestation. Then you’ve got another carbon pollution problem.”

TUI did not directly address concerns with the emissions in SAF production. Regarding scalability, they said they will need help from policy-makers to ramp-up production and research on green fuel.

“Setting ambitious goals is very important,” Sick added. “But they have to be realistic because otherwise people will turn away and say it was clear that it couldn’t be done.”

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How Are These Goals Assessed and Tracked?

The Science-Based Targets initiative (SBTi) helps measure the ambitiousness of SLB targets, however, it has recently come under scrutiny for allowing companies to use carbon offsets to reduce certain Scope 3 emissions. TUI has said that they will not use offsets for the near-term 2026 or 2030 targets, despite the new development. 

The SLB industry doesn’t yet have a widely recognized system of tracking the progress of these goals. There is also no institute that requires companies to disclose their progress to investors.

“There are no tools on the market to track,” says Meng. “If an SLB is issued today and they are targeting five years, the issuers can disclose or can not disclose their progress. It’s not compulsory. Transparency is really an issue.”

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TUI has said that it will be reporting its progress on a yearly basis to SBTi. 

TUI’s SLBs could also come under scrutiny as a new framework, The European Union’s Sustainable Finance Taxonomy, gains traction. The tool is meant to help investors understand whether an industry or economic activity is environmentally sustainable. If the company promises green activities, but the taxonomy says it doesn’t qualify as environmentally sustainable, the company could be seen as greenwashing and lose credibility in the long term. 

The Taxonomy provides specific criteria for aviation activities to qualify as environmentally sustainable activities, such as thresholds for CO2 emissions and sustainable aviation fuel usage. For example, if a company leases an aircraft, it would have to have zero direct tailpipe CO2 emissions to be considered sustainable. The Taxonomy is still in its early stages, however, and is likely to have more of an impact in the future.

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Time will tell whether or not TUI can manage to meet their goals. For now, investors are optimistic about TUI’s plans. “TUI is seen somewhat as a leader in some of these ESG and sustainability efforts,” said O’Connell. “What they’re doing with SLB is putting their money where their mouth is.”

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