(Bloomberg) -- Investors in a controversial corner of the ESG debt market are facing a new layer of uncertainty thanks to a gray area of carbon accounting. 

The Anthropocene Fixed Income Institute, a nonprofit monitoring green claims in fixed-income markets, says it’s found evidence suggesting “creative emissions accounting” helped chemicals company Nobian Finance BV meet a key performance indicator (KPI) that determines the size of its interest payments. Nobian said its approach is transparent, has been approved by an auditor and is based on external guidance.

The Dutch firm says it met an operational emissions target built into the terms of a sustainability-linked bond maturing in 2026. If it had missed the KPI, the company would have had to pay a higher coupon to investors.

The concerns raised by AFII relate to Nobian’s reporting around its so-called Scope 2 emissions, which are supposed to capture the indirect carbon footprint stemming from a company’s purchase of power such as electricity. The AFII says the exclusion of municipal waste incineration (MWI) steam emissions in its Scope 2 estimate risks underestimating the true climate impact.

“Emissions reporting needs to be complete,” said Jo Richardson, head of portfolio strategy at AFII. “Auditors should take a conservative approach to classification, especially when there are associated SLBs referencing that data.”

Nobian referred to its latest sustainability report, in which it said there’s no conclusive guidance regarding whether to count MWI toward Scope 2, and that the energy source “plays an important transitional role” in the company’s efforts to become climate neutral. It also said the 43% fall in its Scope 2 emissions was not because of increased usage of MWI energy.

“Nobian appreciates the critical review of sustainability reporting and data,” a spokesperson for the company said by email. However, “we disagree with the statements by Anthropocene and we reject the suggestion” that there’s been “any kind of creative carbon accounting.”

Sustainability-linked notes have soared in popularity among issuers, with global sales exceeding $200 billion since 2021, Bloomberg Intelligence estimates. Unlike green bonds, whose proceeds are earmarked for environmental projects, SLB issuers can use the funds they raise for anything. 

The rapid growth of the sustainability-linked market has also attracted criticism, as weak and flexible targets alongside tiny penalties leave some creditors cautious.

Nobian had set a 2022 target to cut Scope 1 and 2 emissions. AFII warned earlier this year that reductions on the scale announced would be “very hard to achieve” for the company. Those concerns were echoed by analysts at Barclays Plc, who said Nobian was unlikely to meet its goal.

Why the ‘Scope’ of Carbon Emissions Is Hard to Gauge: QuickTake

Nobian’s latest accounts show it achieved the goal comfortably. Scope 1 and 2 emissions fell 25% from 2021, which coincided with a 43% reduction in its Scope 2 data. By contrast, the company had reported a 7% rise in operational emissions a year earlier. 

Nobian said the decline in 2022 emissions was “mainly due to the amount of contracted renewable energy, in line with our targets, combined with lower demand from our electrolysis plants.” AFII said reported data on Nobian’s electricity consumption and renewable energy make it “hard to see how these adjustments deliver” the reduction reported.

Municipal waste incineration was once touted as a greener, less invasive alternative to landfills, particularly in parts of Europe where such facilities proliferated. But the process generates emissions, and climate activists point to potential public health impacts and the impact on communities. 

Read more: Resistance to Incinerators Escalates, Despite Few Alternative

Nobian said there is no conclusive guidance from the the Greenhouse Gas Protocol around whether — or how — to include MWI emissions in Scope 2 reporting. It said in its sustainability report that a methodology used for Environmental Product Declarations (EN 15804+A2) advises that “emissions are carried by waste generator and thus do not need to be included in the carbon footprint of the steam itself.” 

“In line with this guidance, Scope 2 MWI steam emissions are not included in the company’s Scope 2 emissions,” the annual report said. Nobian’s spokesperson said separately that the company also doesn’t include MWI steam emissions in its Scope 3 reporting.

AFII said that if MWI steam emissions are not captured under Scope 2, it should go into Scope 3 emissions calculations. If that’s not happening, it represents a form of “carbon footprint arbitrage that compromises the realisation of true carbon neutrality,” according to the AFII. 

“These outcomes are not aligned with SLB investors’ objectives and unhelpful to the development of a credible sustainable finance market,” AFII said.

©2023 Bloomberg L.P.