This article first appeared on GuruFocus.

Air France-KLM (AFLYY) and Accor SA (ACRFF) are now facing higher borrowing costs after falling short of greenhouse gas targets embedded in their sustainability-linked bonds, a development that could serve as a real-time test of how much accountability this structure delivers. Alongside Australian petroleum retailer Ampol, both European issuers disclosed over the past week that they missed 2025 emissions milestones tied to bonds sold between 2021 and early 2023. Under the sustainability-linked framework, failing to meet pre-agreed environmental goals results in financial penalties through higher coupons or redemption prices. While the incremental costs appear small relative to the scale of these firms, the misses arrive as the market itself has cooled, with issuance dropping from more than $100 billion in 2021 to $33 billion in 2025, according to Bloomberg Intelligence, amid rising scrutiny and political pressure around ESG policies.

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For Air France-KLM, the shortfall centers on a pledge to reduce jet fuel greenhouse gas emissions per revenue tonne kilometer by 10% in 2025 compared with a 2019 baseline. In its annual report, the airline cited supply-chain constraints, engine issues affecting newer aircraft, and longer flight times on certain routes due to different geopolitical circumstances. As a result, one bond maturing in May will be redeemed at a higher price and another maturing in 2028 will carry a higher coupon, with Barclays Plc calculating a cumulative additional cost of about 7.5 million. Accor failed to meet two emissions targets, one tied to Scope 1 and 2 emissions and another to Scope 3. That triggers a 0.25% coupon step-up for the final two years on a bond maturing in 2028, adding 1.75 million per year, according to its financial statement. The company attributed the miss primarily to growth in geographies with more carbon-intensive energy mixes, including China and India, even as it said carbon intensity relative to hotel surface area declined by around 15% between 2019 and 2024.

Ampol's hybrid sustainability-linked bond, which matures in 2082 and is callable in 2028, will be redeemed at 101% in 2028 due to performance against its 2025 sustainability milestones. If not redeemed, conversion into shares would occur at a 2% discount. The company said emissions at its Lytton refinery in Queensland were 3.5% above target because of a series of planned and unplanned operational events impacting reliability and production. Josephine Richardson of the Anthropocene Fixed Income Institute noted that nearly 250 sustainability-linked bonds carry 2025 target dates, creating what she described as a status check for the structure and its effectiveness. She also observed that secondary-market pricing can be slow to reflect missed targets, suggesting investors may need time to reassess which issuers embedded more ambitious goals and how those differences may eventually influence pricing.

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