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www.environmental-finance.com
WINTER 2020
Are banks
really going
green, or just
greenwashing?
The key themes The big debate: The case for Market Rankings
of 2021 transition bonds natural capital winners revealed
Corporate &
Investment Banking
Working together towards
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Contents
4 News 12 Green bonds
Sustainability-linked bonds Green bonds begin to flow
are ‘more powerful than from emerging market banks
green bonds’ A pioneering initiative by the IFC to encourage green bond
issuance by banks in emerging markets is bearing fruit,
reports Graham Cooper
5 News
S&P’s ESG capabilities
boosted by $44bn IHS Markit 14 The big debate
merger
6 Themes to watch
Transition bonds: Is a transition
bond label still needed, now that
Looking the Sustainability-Linked Bond
Principles have been published?
ahead to 2021 Yes, argues No, argues
Marisa Drew Jacob Michaelsen
Peter Cripps assesses some of the key trends in
sustainable finance to look out for over the next year of Credit Suisse of Nordea
16 Impact
10 Fixed income
ESG ratings in fixed income: Impact is part of pension
A good start trustees’ fiduciary duty,
says coal pensions CIO
ESG ratings should only be used as a first step when it comes
to assessing issuers, a panel at Environmental Finance’s Managing a pensions investment portfolio in line with
ESG and Fixed Income 2020 conference heard. environmental and social impact considerations can be part
Ahren Lester reports of trustees’ fiduciary duty, Michael Hurley reports
Environmental Finance | Winter 2020 1
Contents
18 Cover story 28
Are banks
really going
green, or just
greenwashing?
Some of the world’s largest banks
have made hundreds of billions
of dollars in commitments to
sustainable financing, with
many pledging to align their Environmental markets
portfolios with the goals of the
Paris Agreement. Christopher buoyant despite pandemic
Marchant asks whether these
commitments are impactful
30 GHG markets
24 Natural capital 38 Weather risk
40 Renewable Energy Certificates
45 Catastrophe risk
‘The time is right to 46 People moves
invest in natural capital’ 48 Infographic
How does HSBC Pollination Climate Asset Management
aim to attract large-scale investment in natural capital, 2020: the year the social bond came of age
Michael Hurley asks
Editor Peter Cripps SUBSCRIPTIONS Environmental Finance or otherwise, without the written
Consulting Editor Graham Cooper Business Development Manager (ISSN 1468-8573) is published permission of the publisher.
Assistant Editor Michael Hurley Borte Mehmetcik quarterly by Field Gibson Media Ltd.
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Staff Writer Christopher Marchant E: info@environmental-finance.com Pentagon House, expressed in advertisements and
Data Researcher Ashton Rowntree 52-54 Southwark Street, corporate statements. These are made
Managing Director Tony Gibson London SE1 1UN. by the advertiser and are not checked
Art Direction Sargeant Design Ltd Chairman Peter Field by Environmental Finance.
© Field Gibson Media Ltd, 2020.
Business Development Manager Environmental Finance All rights reserved. No part of this
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2 Environmental Finance | Winter 2020
HSBC
Taking the long view on climate data
HSBC’s analysts have been collecting climate data since 2007. Piers Butler and Ashim
Paun explain the bank’s approach, how the data is used – and what comes next
Environmental Finance: HSBC’s Climate wide decarbonisation has grown and evolved. One
Solutions Database is one of the longest we’re watching particularly closely is the rise of
running corporate climate datasets in the the hydrogen economy: we see an ecosystem of
market. Can you explain its genesis? clean hydrogen production emerging to meet
Piers Butler, head of Global Research demand from across the economy, including from
Direct: The bank has long recognised the threat transport, heavy industry as well as domestic heat.
posed by climate change and the responsibility of
the finance sector to play its part in addressing it. EF: What plans do you have to develop
We established the Climate Change Centre of HSBC’s sustainability-related data offering?
Excellence in 2007 and, in the same year, HSBC AP: Our ESG Database, a new proprietary
Global Research launched the HSBC Climate offering, includes 10 key environmental, social and
Solutions Database. governance metrics for companies under HSBC
We screen listed companies of all market caps coverage. This includes around 1,900 companies
across all global markets for climate revenue globally, with half in Asia Pacific. Data collection
exposure. The database is run jointly by the ESG Piers Butler Ashim Paun
is based on publicly available information and
and Equity Strategy teams, and it involves a year- undergoes a rigorous normalisation process. The
round process of manual gathering of relevant EU Taxonomy – how aligned are the two database has a three-year history, from 2016-18.
climate data. approaches? The 10 key metrics were selected to give a
AP: Almost all the climate themes and technologies broad indication of the status of ESG information
EF: What is unique about the database, and in our framework are covered in the EU Taxonomy, disclosure at companies covered by HSBC Global
how is it used by your clients? including solar, wind, geothermal, marine, hydro, Research. Using this disclosure as a starting point,
Ashim Paun, global co-head, ESG bioenergy, building efficiency and transport our equity analysts look in more detail at sector-
Research: The database offers a toolkit that efficiency. The six environmental objectives of the specific ESG issues and work towards integrating
enables identification of climate change-themed EU Taxonomy – climate mitigation, adaptation, ESG into their financial analysis.
investment opportunities. Its long history of sustainable water use, transition to a circular Our Fragile Planet series of notes and
curated data shows how themes, corporate activity economy, pollution prevention and ecosystem underlying framework of metrics is an additional
in climate technologies, and country- and regional- protection – are all also covered, to a considerable proprietary offering. It explores climate change
level cleantech industries have developed over time. extent, by our framework. vulnerability and resilience across 67 developed,
Our taxonomy is detailed. The database However, the two approaches are somewhat emerging and frontier markets. In our most recent
currently includes 21 climate themes, which are different, with the EU Taxonomy also addressing cut, we use 54 datapoints which explore transition
further divided into more than 80 sub-themes negative ESG impacts, which our Climate risks associated with fossil fuel use and economic
and over 100 product categories. From a starting Solutions database does not currently do. However, dependence, cleantech and industrial innovation
universe of around 14,000 companies, just over we continually enhance our process, methodology potential, physical climate risks and aspects of
3,000 are currently found to have some climate and framework, and this is something we are climate governance.
revenue and enter the database for a detailed examining. Our clients can then look at where they have
analysis. asset exposure across corporate equity and debt,
The raw data can help signed-up clients to EF: Presumably such a broad and long- sovereign debt and real assets, to identify either
identify opportunities, integrate climate change running dataset generates some useful positive drivers or negative risks around specific
into investment management processes and insights into how the climate theme is evolving metrics.
determine the climate exposure of their portfolios. – what signals is it sending? We publish reports each year in which we update
We publish related research notes. These PB: We’ve seen a substantial increase in the the methodology and provide the underlying data
may include analysis of market trends in climate number of companies which our database picks up to clients. In the most recent, Finland was best
themes – i.e. those which look fundamentally more as generating climate-related revenues – up around placed overall, given a relatively good score on
attractive than others. We also publish baskets of four-fold since 2008. There have been particularly physical risks and very low air pollution, strong
companies which give revenue exposure to policy sharp rises in companies from emerging regions – institutional quality to govern environmental risks
changes, country and regional markets, or to LatAm, MENA and Asia. and high levels of innovation in climate-relevant
trends, such as the clean transport transition and The total amount of climate revenues generated sectors.
climate-smart cities. by companies globally has also been increasing, up
by one sixth in the last five years of data.We’ve also For more information, please email:
EF: Its focus on climate-linked revenues seen a growing number of themes and products as askresearch@hsbc.com
is similar to the approach taken by the the industrial response to demand for economy-
Environmental Finance | Winter 2020 13
3
Labelled bonds
Sustainability-linked bonds are
‘more powerful than green bonds’
T
he ‘use of proceeds’ model
adopted by most green bonds
came under attack, at a panel at
Environmental Finance’s ESG in
Fixed Income Europe 2020 virtual
conference, amid allegations that it is
susceptible to ‘greenwashing’.
Speaking at the panel ‘Is the use of
proceeds model fit for purpose’, Jakob
Thomae, managing director for Germany
at the 2 Degrees Investing Initiative
(2DII), described investing in controversial
corporates through green bonds, as being “a
Jakob Thomae, 2DII Johanna Koeb, Zurich Ben Caldecott, Oxford
little bit like having a cousin who is going to Insruance University
school and also taking drugs.
“So, I tell myself I’m just going to give This year the International Capital Market that they would like to get some impact.
him pocket money for school books [the Association (ICMA), which administers And that’s where the green bond or the use
green bond]. And, meanwhile, the other the Green Bond Principles, introduced of proceeds bond has been transparent, for
money he makes he’s spending on his drug principles for sustainability-linked bonds, showing the impact on where the investor’s
habit, but I can be happy because I’m just while guidelines on transition bonds were money is going, and that’s why I still think
giving him the book money.” released in December. there is room for the use of proceeds
The debate over the use of proceeds Ben Caldecott, director of Oxford [model].”
model comes as a range of new sustainability University’s Sustainable Finance Eusebio Garre, head of funding at IDB
labels have been introduced in the sector Programme, said: “Sustainability-linked Invest, said: “Both models have their own
in recent years, including transition bonds, bonds, and indeed sustainability-linked merits, both for issuers and for investors.
which adopt the use of proceeds model, and loans, are a really significant development The KPI-linked model innovates by
sustainability-linked bonds, which do not. for the future of sustainable finance, and are appealing to issuers because it does provide
Responding to Thomae’s comments, much more powerful and important than them with full flexibility on the use of
Johanna Koeb, head of responsible most of the green ‘use of proceeds’ stuff out proceeds, as long as they can commit in a
investment at Zurich Insurance Company, there in the market. transparent and consistent way to improve
said: “I do disagree with the examples “The reason for that is very simple, which very specific KPIs.
he made about green bonds because it’s is that it creates a clear economic incentive “However, I think the jury’s still out
somewhat makes them sound like they’re all for issuers to change their behaviour. The about how many issuers are going to be able
useless, and they’re all greenwashing and it’s magic happens when a key performance to deliver such a consistent and credible
connected to companies as if taking drugs. indicator (KPI) is found that both reduces message.”
So that kind of language, I know is nice and credit risk, but also improves environmental The EU’s forthcoming green bond
provocative, but I think it does injustice to and social outcomes.” standard also came under fire. Thomae
the market. He advocated that the market should said it was possible that under the standard
“The idea of integrity is not necessarily pivot away from green bonds and towards a corporate could issue a ‘use of proceeds’
tied to the instrument. Both the ‘use of sustainability-linked bonds. bond while the overall carbon output of
proceed’ and the sustainability-linked But Jens Hellerup, senior director, head the business rises. He described this as “an
models are focused around transparency of funding and investor relations at Nordic unfortunate choice”.
and integrity, and I think both come in more Investment Bank, the largest issuer of green
ambitious and in less ambitious forms. It’s bonds in the region, defended the ‘use of The panel discussion was moderated by
the duty of investors to make up their minds proceeds’ model: “When we have been Tanguy Claquin, head of sustainable banking,
Crédit Agricole CIB
[about the credibility of the issue].” speaking with investors, they have been vocal
4 Environmental Finance | Winter 2020
M&A
S&P’s ESG capabilities boosted by
$44bn IHS Markit merger
F
inancial services giant S&P
COMPREHENSIVE SOLUTIONS S&P GLOBAL IHS MARKIT
has agreed to merge with
data provider IHS Markit, in ESG scores with time series data ✔
DATA &
a mega deal that will boost Workflow and reporting platforms ✔
PLATFORMS
S&P’s already-considerable Emissions database ✔
environmental, social and governance ESG equity indices ✔
(ESG) firepower. ESG fixed income indices ✔
The all-stock merger values IHS Markit BENCHMARKS
ESG evaluations ✔
at $44 billion, including $4.8 billion of
net debt. Upon completion, current S&P Price benchmarks (carbon, hydrogen) ✔
Global shareholders will own approximately Climate and transition scenarios ✔
67.75% of the combined company, ANALYTICS Plastics circularity ✔
while IHS Markit shareholders will own Asset valuations ✔
approximately 32.25%.
Both companies have been steadily
Company offerings (Source: S&P Global)
increasing the ESG-related products and
services they offer, so the move will have consists of credit ratings, financial markets The scores are powered by the SAM
ramifications for the rapidly consolidating data, Platts energy data and indices. It also Corporate Sustainability Assessment (CSA),
and expanding ESG data market. provides ESG services such as its Global an annual engagement capturing around
Assets that will become part of S&P’s ESG Scores and green bond assessments, 1,000 data points per company. A media
operations include IHS Markit’s ESG the S&P Global Ratings Green Evaluation. and stakeholder analysis further captures a
Reporting Repository, an online platform Currently S&P’s Global ESG Scores company’s involvement and management
for the collection, storage and dissemination assess the industry-specific ESG factors of ongoing ESG issues or crisis situations.
of corporate ESG data and reports. expected to have an impact on a company’s S&P bought SAM’s ESG research capability
IHS Markit earlier this year launched growth, profitability, capital efficiency from Robeco earlier this year, the latest in a
country-level data for more than 200 and risk exposure. The scores contain series of ESG-related acquisitions.
countries with a 10+ year observation coverage of 7,300 companies, representing In 2016, S&P Dow Jones Indices (DJI)
period for 40 key sovereign risk factors. In approximately 95% of global market acquired environmental data provider
2019, it developed a service to provide ESG capitalisation. Trucost. Christopher Marchant
information specifically for private equity
firms, their investors and their portfolio
companies. Deutsche Börse buys majority stake in ISS
In the same year, IHS Markit launched German financial exchange operator Deutsche Börse has acquired a majority stake in
Institutional Shareholder Services (ISS), valuing the corporate governance and environmental,
a Global Carbon Index which tracks the social and governance (ESG) data provider at over $2.2 billion.
performance of the largest and most liquid The Frankfurt Stock Exchange operator said the partnership of its Qontigo arm – which
carbon markets – the European Union’s combines its STOXX and DAX index business with its Axioma analytics unit – with the
Emissions Trading System, the California capabilities at ISS will provide additional ESG opportunities for growth in the fast-growing
sector. In particular, the deal will allow Deutsche Börse to provide stiffer competition for MSCI
Cap-and-Trade Programme, and the
and other providers of ESG indexes. Ironically, MSCI preciously owned ISS.
Regional Greenhouse Gas Initiative on the Deutsche Börse chief executive Theodor Weimer said: “Together, ISS and Deutsche Börse
east coast of the US. have complementary ingredients to become one of the globally leading ESG players of the
IHS Markit is also a registry provider future.”
for the voluntary carbon markets, a role for ISS has been one of the most acquisitive players in the ESG data market. In February 2019,
it bought CAER, a provider of ESG research on Australasian companies. Two and a half years
which it has regularly been recognised in ago, ISS bolstered its ESG offering through the acquisition of German ESG data provider and
Environmental Finance’s Voluntary Carbon second opinion provider Oekom. The deal came just months after ISS bought the investment
Market Rankings. climate data division of South Pole Group. In 2015, it acquired green advisory firm Ethix,
Meanwhile, S&P’s sprawling business expanding its environmental services. Ahren Lester
Environmental Finance | Winter 2020 5
Themes to watch
Looking ahead to
Peter Cripps assesses some of the key trends in
sustainable finance to look out for over the next year
1. COP26 2. Race to net-zero carbon
Whether it turns out to be a success or a A Race to Zero Campaign was launched in
failure, one of the key moments of 2021 will June by the UNFCCC, as pressure mounts
be COP26, in Glasgow in November. to take action ahead of the COP.
The landmark Paris Agreement, at There have already been numerous
COP21 in 2015, allowed countries to set net-zero commitments in recent weeks,
their own targets. But as part of the deal, including:
countries were expected to ratchet up their • The UK in December raised its 2030
commitments every five years. target to 68% compared to 1990 levels, up
That was supposed to happen in 2020 at from 53% previously, to help it meet its “More pension funds
COP26, but it was delayed a year because 2050 net zero target. It claims this would
of the coronavirus. Now there is even more be the fastest rate of decarbonisation of and asset managers
urgency surrounding the event.
Being held in the UK, it is hoped that this
any major economy.
• Japan in October said it will cut emissions
will make net zero
COP will have a particularly strong focus to net zero by 2050, up from its previous commitments for 2050,
on finance, led by former Bank of England target of 80% by the same date.
governor Mark Carney, who has been • South Korea in October also pledged a with near-term targets.
appointed the Prime Minister’s Finance 2050 net zero target.
Adviser for COP26. Climate finance and • China, the world’s biggest GHG emitter, The Net Zero Asset
the role of financial institutions and central
banks will therefore be under the spotlight.
in September said it would hit net zero Owner Alliance will
before 2060. This was its first net zero
Another key aspect to watch will be how target. dominate, as the most
Article 6 is progressed. It should clear up Paris-based policy research institute IDDRI
the role of carbon markets in the agreement, argues that net-zero targets are the legacy of serious and influential of
including the extent to which countries are COP21. these commitments”
allowed to use offsets to help hit their targets. Its recent paper on climate neutrality
Also, look out for developments on the points out: “As of November 2020, more Fiona Reynolds, Principles for
Just Transition (see below). than 110 countries have committed to a Responsible Investment
net-zero objective. These represent in total
6 Environmental Finance | Winter 2020
around half of the world’s GDP and global Will the change in attitude towards
CO2 emissions, and include notably the climate also boost the uptake of ESG in the
totality of the G7 and a majority of the G20. country?
“Carbon neutrality has also become a
reference for a growing number of non- 4. Central banks step up their
state actors (NSAs). For example, 1,100
companies have adopted carbon neutrality
focus on sustainability
goals and joined the UK COP26’s Race to Central banks have in recent years become
Zero Campaign alongside other NSAs. key players in sustainable finance.
“It is stunning to see how fast this concept The Central Banks and Supervisors
of carbon neutrality, barely discussed Network for Greening the Financial System
beyond experts before 2015, is now (NGFS) now has members accounting for
mainstreamed and widely understood by more than 60% of global emissions.
leaders and society.” In an interesting development, it has been
Investors are not immune from this trend. widely reported that the US Federal Reserve
The Net Zero Asset Owners Alliance is has applied to join the NGFS.
already gaining traction, with 33 signatories While it now seems that many central
representing $5 trillion of assets, which banks accept that climate change is a
have committed to reduce their portfolio legitimate part of their remit on financial
emissions to net zero by 2050. stability/systemic grounds – this was not the
Fiona Reynolds, CEO of the Principles case five years ago – it remains to be seen
for Responsible Investment, predicts: “More how far they will go in promoting this cause.
pension funds and asset managers will make Eurozone banks will, in 2022, be stress-
net zero commitments for 2050, with near- tested on their ability to withstand climate-
term targets. related risks, the European Central Bank has
“The Net Zero Asset Owner Alliance will said.
dominate, as the most serious and influential In the UK, the PRA is starting to stress
of these commitments. Pension funds test banks and insurers, while the FCA is
will realise that engagement alone will not making TCFD reporting mandatory.
get them to net zero – they need to move The NGFS has devised scenarios that
investments from brown to green and invest should help with TCFD-style reports and
in negative emissions technologies.” have been used to inform stress tests by the
French central bank.
3. The US reawakens A recent report by the London School of
After four years in the wilderness, the US Economics, which examines the pandemic
is expected to push forward with action on response measures by central banks in 180
climate change. countries found that just one – Fiji – takes
President-elect Joe Biden has pledged to climate and sustainability factors into
rejoin the Paris Agreement, and has made account.
climate change one of his top four priorities. Since then, Sweden’s Riksbank has said
Despite the current administration having it will start to exclude corporate bonds
ignored climate change, there was a growing from its asset purchases on norms-based
trend towards climate action at city, state and criteria, such as breaches of the UN Global
company level. Compact.
What will Biden do to make up for lost
time? 5. Natural capital concerns
Biden’s website says: “As president, Biden Accelerated by the Covid-19 pandemic,
will lead the world to address the climate investors are rapidly waking up to the
emergency and lead through the power of dangers posed by biodiversity and habitat
example, by ensuring the US achieves a loss.
100% clean energy economy and net-zero There have already been numerous
emissions no later than 2050.” developments, such as a report by the
So, will he set an official net zero target, Dutch central bank saying that the country’s
for example? What will his Green New Deal financial institutions held €510 billion ($600
look like? billion) of investments that were exposed to
Environmental Finance | Winter 2020 7
Themes to watch
biodiversity risks. it could boost credibility.
Earlier this year, four French fund
managers — Axa Investment Managers, 7. Implementation of the EU
BNP Paribas Asset Management, Mirova
and Sycomore Asset Management –
Action Plan
launched an initiative to develop a tool The EU’s ambitious and sprawling
to help investors integrate nature and Sustainable Finance Action Plan is the
biodiversity considerations into their biggest concerted policy effort to implement
decision making, while a group of Dutch sustainability into the financial system.
financial institutions established the But as its efforts start to bear fruit, what
Partnership Biodiversity Accounting impact will it have on the market?
Financials to measure the positive impact of It has so far made progress on initiatives
investments in biodiversity. such as a ground-breaking taxonomy of
2021 could be the year of action. climate mitigation and adaptation activities,
There are hopes that the UN Biodiversity which will underpin initiatives such as a
Conference in Kunming, China, between green bond standard. Its taxonomy is out for
17-30 May will lead to commitments for ‘no consultation, but it leaves the highly political
net biodiversity loss by 2030’. question of nuclear in the balance – could it
The Task Force on Nature-related find its way back into the programme?
Financial Disclosures (TNFD) this year Mark Carney: Investors should be given It has appointed a ‘Platform’ on
established an informal working group to an automatic advisory vote on companies’ sustainable finance, which will start the
help financial institutions better understand transition plans work of extending the taxonomy into other
and report their nature-related risks and environmental and social areas. It is also
impacts. In collaboration with the corporate set to consider looking at a so-called brown
sector, reporting frameworks will be EU has announced plans to raise, via green taxonomy – covering activities that are
developed in 2021, and tested early in 2022 bonds, some 30% of the funds it intends to environmentally harmful.
before being made available worldwide. The borrow from public markets and has already It has published low-carbon and transition
Task Force will be fully established in the issued over €30 billion of social bonds to benchmark criteria – will this trigger a raft
second half of 2021. help protect jobs. of new indexes, and how extensively tracked
This trend will likely lead to more “Overall, we expect sovereign and SSA will they be?
products to address biodiversity loss, issuance to make up a growing share of Sustainability disclosures will begin in
particularly those that focus on land use and overall [labelled] bond issuance in 2021, as 2021 but many are claiming that there is
the blue economy. governments find ways to fund their large insufficient data to allow them to report,
For example, Pollination Capital and stimulus spending,” the note said. particularly asset managers.
HSBC have launched a $1 billion fund to Meanwhile, the Sustainability-linked Perhaps most importantly of all, will
focus on natural capital solutions (see page Bond Principles were launched in June and its regulations and initiatives be emulated
24). there have already been six issues since, elsewhere around the globe, making the EU
Environmental Finance has launched a raising more than $6 billion combined, the standard bearer of sustainable finance?
channel on natural capital to make stories according to Environmental Finance’s Bond
on biodiversity and other aspects of natural Database. 8. Transition
capital easier to find. A transition finance handbook was Transition will remain the real ‘buzz word’
released in December. However, debate in 2021. After all, the aim of the game is
6. The labelled bond market at a rages as to whether such a label is needed, or to move away from ‘business as usual’ to
whether the standard green bond label can something more sustainable, preferably
crossroads incorporate transition. alignment with the 1.5°C goal of the Paris
It has been an interesting year for the The labelled bond market is evolving fast Agreement.
labelled bond market. The green bond but is also under intense scrutiny to prove Mark Carney recently suggested investors
market has finished with a flourish, despite that it ‘makes a difference’ and is not just a could be given an automatic advisory vote
a blip as a result of the pandemic, while the marketing gimmick. on companies’ net-zero transition plans,
social bond market enjoyed a stellar year, Sustainability-linked bonds are gaining similar to ‘say on pay’ shareholder rights to
with a seven-fold rise in the value of issuance traction but to what extent will they help vote on executive remuneration.
compared with the previous year. this market grow, or will they cannibalise it? However, it is a subject that continues to
A recent note from Barclays said ongoing The green bond market could also take a hit be fraught with controversy.
government stimulus could help boost to issuance volumes as a result of the EU’s The real problem is that we still don’t
labelled bond supply. It points out that the forthcoming green bond standard. However, know what the scenarios are or what the
8 Environmental Finance | Winter 2020policy pathways are. It will be interesting But the extent to which impact can are ‘green’.
to see if regulators, perhaps through the become a mainstream investment category, But there are concerns around whether
NGFS, build some central scenarios under rather than a niche, remains to be seen. After offsetting is really the right answer. The
which everyone must report. all, a case can be made for ESG because ‘Financing credible transitions’ paper from
While some feel that a separate transition it can be used to help mitigate risks. But Credit Suisse and Climate Bonds Initiative
finance label is needed, others argue that making investments that produce a positive doesn’t consider them to be a serious
the EU taxonomy of sustainable finance impact on people and planet alongside a solution, for example.
activities should suffice because it contains financial return is a harder sell to investors The Taskforce will issue a final report
stretching targets for sectors that need to with fiduciary duties. in January, including a roadmap for
transition, such as cement and steel. The PRI is incorporating “real world implementation.
outcomes” into its reporting next year, in a The market seems set for rapid growth,
9. Just transition nod towards where the market is heading. and prices could also be pushed up by the
Countries that have signed up to the Paris However, this has proved controversial, standardisation of credits.
Agreement have agreed to “take into with Norway’s giant sovereign wealth fund
account the imperatives of a just transition warning of mission creep. 12. Consolidation of ESG
of the workforce and the creation of decent A report from law firm Freshfields into
work and quality jobs in accordance with impact investing, which has been delayed
reporting standards
nationally defined development priorities”. until 2021, could make a significant In November, we learned that the
Companies must also take notice. In difference – in the same way that a similar Sustainability Accounting Standards Board
November, energy utility SSE published report published in 2005, around ESG and (SASB) and the International Integrated
what it says is the first company Just fiduciary duty, helped boost the uptake of Reporting Council (IIRC) are to come
Transition plan, following pressure from ESG. together to form a new organisation, the
investors to spell out how it plans to support Environmental Finance has its own Value Reporting Foundation.
employees, consumers and its supply chain dedicated Impact channel. The merger is a significant step towards
as it cuts its emissions to net zero by 2050. simplifying the corporate reporting
Its 19-page Supporting a Just Transition 11. Voluntary carbon markets set landscape, linking the IIRC’s integrated
document sets out 20 principles across five reporting framework with SASB’s disclosure
key themes: good green jobs; consumer
to boom standards.
fairness; building and operating new assets; A Mark Carney-initiated taskforce focused The Value Reporting Foundation, which
looking after people in high-carbon jobs; and on rapidly scaling up global voluntary will be led by SASB chief executive Janine
supporting communities. carbon markets in November opened to Guillot on its formation ‘in mid-2021’ could
To coincide with the publication of consultation on its initial report on forming a eventually integrate other entities, and the
SSE’s strategy, investors Friends Provident global carbon market. Foundation and the Climate Disclosure
and Royal London published a set The Taskforce on scaling voluntary Standards Board (CDSB) have jointly
of ‘expectations’ for energy utilities when carbon markets (TSVCM) said voluntary signalled interest in entering into exploratory
developing just transition strategies. Colin carbon markets must jump 15-fold by 2030 discussions in the coming months.
Baines, investment engagement director to achieve global climate goals of limiting The merger will also advance the work of
at Friends Provident, told Environmental global temperature rises to 1.5°C by the end the Statement of Intent To Work Together
Finance the investor has been working with of the century. Towards Comprehensive Corporate
Royal London on similar engagements with Although recognising that the voluntary Reporting. Published in September, this
EDF, Eon, RWE, Centrica and Iberdrola- carbon market has made “significant was a summary of alignment discussions
owned Scottish Power. strides” since its early days in both market among leading sustainability and integrated
Expect more focus on the Just Transition functioning and credit integrity, in order reporting organisations including the IIRC
in the build-up to COP26. to be able to scale significantly, “structural and SASB as well as the CDSB, CDP and
challenges” need to be solved, including a the Global Reporting Initiative (GRI).
10. Impact – can it go mainstream? lack of consistency and price transparency. Guillot said: “We stand ready to engage
The Taskforce outlined 17 with the efforts of the IFRS Foundation,
Impact investing is an exciting and rapidly recommendations across six topics. These IOSCO, EFRAG, and others working
growing part of the sustainable finance include establishing core carbon principles towards global alignment on a corporate
market. Some argue it is the next phase (CCP) that could be used to create reporting system.”
of sustainable investment, following ESG standardised benchmark contracts to be In July this year, SASB and the GRI
integration. listed on exchanges. also announced a collaboration to show how
Big firms such as Bain are lending As well as companies making net-zero their two standards can be used together to
credibility, in the form of scale, with the commitments, more investors are turning to help ease the reporting burden.
launch of $1 billion impact funds. offsetting to help them claim that portfolios So, watch this space!
Environmental Finance | Winter 2020 9Fixed income
ESG Ratings in fixed
income: A good start
ESG ratings should only be used as a first step when it comes to assessing
issuers, a panel at Environmental Finance’s ESG and Fixed Income 2020
conference heard. Ahren Lester reports
P
roviders of environmental, ESG rating for a company. Issuers are
social and governance (ESG) rarely informed about when or how these
ratings have been urged changes happen, however.
by fixed income market Federated Hermes research and
participants to be more sustainable fixed income head Mitch
transparent with their underlying data Reznick warned that using ESG ratings
and methodologies, so that the tools can as the key performance indicator on
become more credible and convenient. which the coupon of sustainability-linked
Speaking at Environmental Finance’s bonds hinge should be avoided for as
ESG in Fixed Income Europe 2020 long as there is the risk that issuers could
virtual conference, Moody’s Investors go “ratings shopping” to find the most
Service ESG senior vice-president favourable score to use. This is an issue
Swami Venkataraman said “the scores are compounded by the lack of transparency
important, but I think equally important on data and methodologies.
– or perhaps even more important – is
the reasoning and the thinking behind the Importance of ratings analysis
scores”. However, Reznick said ESG ratings are an
Swami Venkataraman, Moody’s Investors
Ørsted ESG engagement head Christine “important part” of the analysis, assessment
Service: look beyond the ESG scores
Sobieski added that there is increasing and pricing of ESG risks as a quick and easy
interest from banks using ESG ratings way to grab information for an initial look.
in sustainability-linked loans, raising the He told Environmental Finance, however,
prospect that they could find their way that it was a “colossal mistake” for ESG detail from a first look in a note
more extensively in the fixed income investors to merely run ESG ratings over when looking at a universe of 20,000
market through sustainability-linked their portfolio. companies,” he said. “So, we need to start
bonds in the future. ESG Portfolio Management managing somewhere, and that is where we use
“This is a really positive development,” partner Christoph Klein agreed that ESG ESG ratings to screen the issuer. But it is
she said. “But I would say that in order ratings are “just a starting point” in his just the first step, and all the other analysis
for us, as a company, to be more likely ESG fixed income investment process, follows after that.”
to actually use ESG ratings in the effectively serving as an initial exclusion
sustainability targets that are linked to filter, before digging deeper into the Mixed messages
such financial instruments, I think that we company. Klein said the firm starts by Reznick emphasised that ESG ratings
will need to see more transparency and selecting only BBB or higher ESG-rated come with significant downsides – not
predictability around the methodologies firms before applying additional exclusion least being that not all ESG ratings
used by ESG ratings.” criteria and then measuring their impact “deliver the same message” on ESG for
She added that ESG ratings agencies on the UN Sustainable Development the same issuer. One rating may focus
adjust their methodologies regularly, Goals (SDGs) and climate risk. on the financial materiality of their ESG
sometimes resulting in changes to the “It is just impossible to get full profile, whilst another may be focused on
10 Environmental Finance | Winter 2020Christine Sobieski, Ørsted: Need for more Mitch Reznick, Federated Hermes: ESG Christoph Klein, ESG Portfolio transparency and predictability around ratings are an “important part” of the analysis Management: Ratings are “just a starting methodologies point” in the investment process the ESG values woven into the fabric of record? Do you say that it may be electric ‘Here to stay’ the company itself. The outcome is that cars, but the cobalt is being mined using there is often limited correlation between child labour in the Democratic Republic Reznick suggested ESG ratings may ratings. of Congo? Oftentimes, ESG investors have been “eclipsed” by the “increasingly Venkataraman agreed, explaining are not all the same and they can give sophisticated” way investors now handle that Moody’s has its own ESG scores importance to different aspects of this, ESG. He said investors are asking about increasingly integrated into its core just as ratings do,” he said. carbon footprints of a portfolio, or credit reports which focus on financial other socially responsible investment materiality. Meanwhile, Moody’s owns Looking forward metrics, which ESG Ratings often do not V.E, formerly known as Vigeo Eiris, There is also the challenge of the largely provide. Instead, he is turning to tools, which takes a “broader perspective” on backward-looking data underpinning the such as those provided by CDP and the ESG Ratings and looks beyond financial ESG Ratings. Sobieski said that an ESG Transition Pathway Initiative (TPI). materiality. Rating – which usually lasts a year – can be ESG ratings are “here to stay,” he adds, “We acknowledge the need for that and based on data that is as much as two years but “every analyst and portfolio manager why some investors may want to have that old. Even the freshest ratings, however, needs to really dig further – talk to the perspective as well,” he said. only offer a snapshot of the ESG profile companies and use the other primary In August 2019, the Massachusetts of a company at that moment in time sources of information that are out there”. Institute of Technology published a with little consideration for their forward- Venkataraman said this approach was research paper of five ESG raters – V.E, looking ESG trajectory. not hugely different from how credit KLD, RobecoSAM, Sustainalytics and “Maybe I build a portfolio of low rated ratings are used by investors. “Credit Asset4 – which showed an average bonds from an ESG point of view, but I rating agencies put out our ratings – and correlation of 0.61 between their ESG think these are the transition companies investors want them and use them – but scores. In contrast, the correlation of that are moving in the right direction,” investors have their own credit analysis the credit ratings of Moody’s Investors said Reznick. “It makes sense to be in process in coming up with their own Service and S&P Global Ratings – the those corners of the market as well as with judgement. I see the use of ESG Ratings two main providers – stood at 0.99. the leaders. I think that is how you affect as being very analogous to that.” Venkataraman said that this lack of change as well.” So, is it time to regulate ESG ratings correlation was not a case of “factual Klein agrees that it is “absolutely clear” like credit ratings? Reznick does not divergence” but rather of different that focusing on transition is the way to think this is required until ESG ratings emphasis. As an example, he pointed to drive positive ESG change. “If you only have a similarly material financial impact US electric vehicle maker Tesla. buy the best, it can be expensive. It is all on pricing and valuations as their credit “Do you say they have an excellent about your future potential – both in price cousins. climate profile? Do you say that they terms, but also on ESG and sustainability “I’m not sure we are there yet,” he have a controversial governance track terms.” said. Environmental Finance | Winter 2020 11
Green bonds
Green bonds begin to flow
from emerging market banks
A pioneering initiative by the IFC to encourage green bond issuance by banks in
emerging markets is bearing fruit, reports Graham Cooper
G
reen bonds have now been issued Jean-Marie Masse, chief investment officer arranged by Symbiotics.
by more than 65 countries. But at the IFC. “We teach them the benefits of Symbiotics provides advice to banks,
the market remains dominated green bonds and how to issue them.” pension funds and other institutional
by development banks, European The training was designed in partnership investors about sustainable and inclusive
sovereigns and utilities, and with the International Capital Market finance and serves as an asset manager
government agencies in Europe and the US. Association (ICMA) and gives bankers a for their ‘impact’ investments, particularly
Issuance from emerging markets has grounding in the Green Bond Principles in developing countries. Two Symbiotics
grown rapidly in the past year but, aside and the importance of green bond issuers’ executives attended the Stockholm course,
from China and a few sovereign issues, the disclosures to investors, with case studies so “we were training the trainers,” notes
bulk of these bonds have come from the and workshops helping to illustrate best Masse.
energy sector. practice. All four Turkish deals were labelled green,
This is starting to change, however, thanks sized at $50 million, and listed in Dublin.
largely to an educational initiative aimed at
financial institutions in emerging markets
“We teach them the They varied in tenor between four and 10
years. The Ego fund has allocated about 3%
which forms part of the International benefits of green bonds of its assets to each of them.
Finance Corporation’s (IFC) Green Bond The Symbiotic bonds were smaller in
Technical Assistance Program (GB-TAP). and how to issue them” size – ranging from $3.5 million to $10.25
Organisations attending the course have Jean-Marie Masse, IFC million – and their proceeds were used for
issued eight bonds since August 2019, loans to financial institutions in Sri Lanka,
raising a combined $228.25 million. Peru and India. The latter two were labelled
GB-TAP was launched in January In total, 19 banks from 11 countries as social bonds while the Sri Lankan deals
2019 to complement the Amundi Planet were represented on the course: Thailand, were both labelled green. One of the Sri
Emerging Green One (Ego) fund – the Philippines, Indonesia, Georgia, Armenia, Lankan bonds was issued in US dollars but
world’s largest emerging market green bond Turkey, South Africa, Nigeria, Benin, the other three bonds were issued in local
fund – in which the IFC is a cornerstone Togo and Senegal, says Johan Nordlund, currencies.
investor. While the $1.42 billion fund created programme director – finance, at the Symbiotics used a special purpose vehicle
demand for emerging market green bonds, Stockholm School of Economics Executive – Micro, Small and Medium Enterprises
the GB-TAP was designed to create supply. Education. They were joined by two Bonds SA – to issue these bonds, which
The training course at the heart of representatives from Symbiotics, a European are all listed in Luxembourg. This structure
GB-TAP was initially run as a two-day firm that helps arrange financing for micro, allows a single issuing framework to be
event in Singapore and Thailand, then as small and medium size enterprises in used for all four bonds, thus minimising
a five-day course at the Stockholm School emerging and frontier markets. transaction costs, notes Dirk Dijksma,
of Economics in June and October 2019. Covid-19 has brought an end to the in- Symbiotics’ Geneva-based head of
Attendance on the Stockholm courses was person events but the course material is now innovation investments. Each bond is linked
by invitation only and preference was given being converted into an online format. This to a single loan, he explains.
to banks that were already issuing in the will first be presented to bankers in Eastern “I see huge potential” in this model,
traditional bond market. Europe and Africa and then, on a separate says his colleague Mattia Corato, a
The course tutors explained why green occasion, to potential issuers from Latin London-based portfolio advisor. Two more
bonds could be a better option for such America, says Masse. bonds – both from Armenian banks – were
banks, by helping them broaden their The bonds issued since the Stockholm coming to market as this article went to
investor base and motivate their staff, in training fall into two groups. Four were press. One was labelled green, the other
addition to the environmental benefits, says issued by Turkish banks and four were sustainability.
12 Environmental Finance | Winter 2020Now tracking
Green and
Sustainability-
www.bonddata.org Linked loans
The most comprehensive source of
information on the green, social and
sustainability bond markets.
User friendly Exportable All the information
interface data you need at your
finger tips
Subscribe to:
Access deal information: Filter by: Keep up to date:
• Financial documentation • Bond type • Issuer name • Graphs and charts
• Lead managers • Country • Issuer type provide an overview
• Investor presentations • Currency • Sustainable of the market
• Information memoranda • Date Development • Drill down into areas
• External assessment • Domicile Goals of interest
forms • Identifier • Use of
(CUSIP, ISIN) proceeds
To request a demo, please contact us at subs@bonddata.orgThe big debate
Transition bonds
and participation from more issuers along
Yes, argues Marisa the credit curve. The five transition principles
In respect of transition investment The Financing Credible Transitions paper
Drew of Credit Suisse opportunities, investors were also lays out five principles for an ambitious
F
beginning to grumble about the fact that transition:
1. Align with zero carbon by 2050 and
irst, let me explain why we there are many self-labelled ‘transition’ nearly halving emissions by 2030;
launched in September the or other types of labels cropping up, but 2. Be led by scientific experts and not be
Financing Credible Transitions with no consistency to the labels and no entity- or country-specific;
white paper with the Climate agreed methodology or market-adopted 3. Be sure that credible transition goals and
Bonds Initiative (CBI). The framework to govern the transition market pathways don’t count offsets;
4. Include an assesment of current and
documents present a framework designed and help protect it from greenwashing. expected technologies which can be
to support the rapid growth of a transition Meanwhile, from the issuer community, used to determine a decarbonisation
bond market and define what a transition I was hearing a great deal of frustration pathway;
label should encompass. from high carbon-emitters that really do 5. Be backed by operating metrics rather
than a commitment or pledge.
I was hearing directly from institutional want to make the investment to transition,
debt investors who were keen to put more but do not qualify under existing green
money to work in sustainable strategies bond market principles to access that apply not only at a use of proceeds level
generally, but also specifically in supporting market. These companies recognise that but also at an enterprise level – we are
transition opportunities. In addition to they need a huge amount of investment to trying to encourage whole-business model
wanting to see more brown-to-green migrate their business models and would transitions in addition to investments in
corporate issuance, they wanted to see a like to access a dedicated pool of transition- greener activities or projects. And we want
broader definition and more diversity in the aligned capital. to make sure that the transition label and
‘uses of proceeds’ in the green bond market In response, we surfaced these issues concept is not limited to debt; we think this
to the CBI, who agreed that there was a should be applicable to equity issuances,
gap in the market. We first explored the asset-backed structured solutions, and so
possibility to expand the existing Green on.
Bond Principles (GBPs) in an attempt to We actually think sustainability-linked
bridge this gap and meet these stakeholder bonds and loans represent a subset of
requests. There was, however, a general transition finance that can neatly fall under
reluctance to adjust the GBPs because they our proposed transition framework and
are well understood by the market and ethos.
operate effectively and efficiently at scale. They are not mutually exclusive – we
Instead, we birthed the notion of creating think they’re actually complementary. That
a ‘sister market’ to sit alongside the green said, not all issuers or investors want to see
bond market, with a specific framework their coupons linked to sustainability KPIs,
and robust set of principles for those and linking the cost of capital to KPIs does
dedicated to a sustainable transition. not work for all asset classes.
And after a year’s work we came out We want to encourage the broadest,
with a paper to articulate this vision. most inclusive lens when thinking about
For issuers looking to use the the provision of capital to fund transitions
transition label, it prescribes five while still protecting the integrity of
principles (See box). the markets to allow them to scale with
Given the investment needs of confidence.
trillions of dollars to ultimately get
us globally to a net zero emissions Marisa Drew is chief sustainability officer
and global head of sustainability strategy,
status, we wanted this framework finance and advisory at Credit Suisse.
to have a broad reach and to
14 Environmental Finance |Winter 2020Is a transition bond label still needed, now that the Sustainability-Linked Bond
Principles have been published?
Taxonomy would provide3) the risk of
No, argues Jacob ‘Greenwashing’ goes up. To this extent,
it seems to me that, from a broad market
Michaelsen at Nordea perspective, ‘Transition Bonds’ carry
more potential downside risk than we
Note: For the purposes of this article, the term Transition Bond
refers to ‘use of proceeds’ bonds only can hope to gain from them.
L
et me be clear to begin with – Sustainability-linked structures are
‘Climate Transition Finance’ is better suited to address
arguably the most important transitioning anyway
topic for the sustainable finance
market to deal with in the More specifically to the point of this
coming 12-36 months. And rightfully so. article, I maintain that Sustainability-
We have already spent considerable time Linked Bonds (SLBs) are better
on accepting Green into the mainstream, suited to deal with transitioning than
and have even gone to great lengths in Transition Bonds, for the simple point
codifying this in a Taxonomy as part of that sustainability-linked structures are
the EU’s Sustainable Finance Action Plan. forward-looking in nature, and use-of-
This inevitably leaves the topic of ‘Brown’ proceeds are not (necessarily). That is,
or ‘Transition’ (recognising that these SLBs require improvements on a KPI
terms are not synonymous) as the next, – or the transitioning from something to
but not final, frontier. something better.
Indeed, this was recognised by the EU- That is in contrast to Transition Bonds,
appointed Technical Expert Group on where we cannot guarantee overall
Sustainable Finance in their final report improvement of the issuer, but simply that
on the Taxonomy, where they highlighted the underlying projects are “not as dirty as
that a fully realised Taxonomy should they could be”.
incorporate also “technical screening anything that is not ‘Dark Green’ Obviously the market for SLBs is still
criteria for significant levels of harm to represents transitioning. in its infancy and one could certainly
environmental objectives. (...) So-called 2. Green bonds are/should be for highlight that we need better definitions
‘brown’ Taxonomy criteria.” everyone. To this point, it is somewhat of what “material” and “ambitious”
hollow to say that an oil company can’t means – especially in the context of
The case against ‘Transition issue a green bond if you would buy transitioning. That said, I maintain that,
Bonds’ a green bond from any of the major for the time being, we are better off, as
banks, most of whom have significant a market, to give SLBs our full attention
With that said, let me also be clear and oil-related exposure on their balance instead of diverting it to a label that is not
state that I do not believe the market sheet. In any case, isn’t a green bond fully understood and which may call into
currently needs a new Transition Bond from, say, an oil company seeking to question the validity of the overall labelled
label. The key reasons for this are: invest into renewable energy not the bond market. That hardly seems a sensible
1. ‘Transition’ is already baked into the purest form of transition there is?2 move to me.
Green bond market. This is eloquently 3. In the absence of clear and well agreed-
formulated in the ‘Shades of Green’1 upon definitions for what constitutes a Jacob Michaelsen is head of sustainable
relevant transition (such that an updated finance advisory at Nordea.
methodology, where, in essence,
1. As popularised by ‘CICERO Shades of Green’, the second party opinion provider
2. I recognise that many would argue that this would require a credible transitioning story away from fossil-based energy production. A valid point, but one that deserves more nuance than can be
afforded here.
3. There is already a number of credible and relevant initiatives providing guidance on this, such as the Transition Pathway Initiative
Environmental Finance | Winter 2020 15You can also read
