By Melissa Menzies on July 17, 2019

Navigating Developments in the Sustainable Finance Market

On June 18th, in the heart of London’s financial district, Sustainalytics hosted its inaugural breakfast symposium, Navigating Developments in the Sustainable Finance Market. It was a full house, with over 60 engaged attendees, including Sustainalytics clients, prospects and partner financial institutions. The expert panel focused on developments and trends in the European and global sustainable finance space. Sustainalytics’ own Trisha Taneja (Sustainable Finance Solutions Product Manager) was joined by David Zahn, Head of European Fixed Income at Franklin Templeton Investments, and Heike Reichelt, Head of Investor Relations and New Products at the World Bank. Kevin Ranney (Director, Sustainable Finance Solutions) moderated the panel.

As Mr. Ranney accurately noted in his opening remarks, it “is a really important time in our space”.  The panel followed Environmental Finance’s Green Bonds Europe conference (co-sponsored by Sustainalytics), and coincidentally happened the same day the European Union released the most recent version of the taxonomy for sustainable finance. The much-anticipated taxonomy now includes a section dedicated to defining a voluntary green bond standard for European issuers. 

Defining sustainable finance

A common topic of debate in the sustainable finance community, much like the broader ESG research industry, is coming up with a definition of what sustainability, or green, really means. Sustainable finance was deemed an “umbrella term” by the panel, referring to a mix of both sustainable project finance through mechanisms like green bonds, as well as integrating corporate level ESG ratings provided by firms like Sustainalytics to serve investor audiences. There was also mention of a rapidly growing corporate audience through ESG linked loans.[1]

Ms. Reichelt took the audience through the ABC’s of sustainable investing: A for avoiding things in your portfolio (the socially responsible investor, or SRI); B for evaluating one’s holding for ESG risks so they benefit shareholders or stakeholders (ESG investing); and finally the C for contributing to society, creating positive impact beyond one’s immediate circle. The panel argued that sustainable finance has moved beyond green bonds, with Ms. Taneja noting the focus on social and sustainability/SDG bond issuers, which also broadens issuer asset pools, and Mr. Zahn commenting on Franklin Templeton focusing not just on a one-time, green bond issuance, but rather beyond siloed issuance to companies “engaged in energy transition across the firm”, with the green bond as merely one avenue of positive impact.

“What you cannot define globally is a definition of green.”

The panel also focused on the fact that the global sustainable finance community needs to include emerging markets as part of the solution, with mention of the need for “regionalization” of the guidelines that inform green, social and sustainability bonds, as opposed to the existing international principles.[2]  

Distinct differences were observed between the “well developed” European market, and its pending green bonds regulation, to the tipping US market and its untapped municipal bond market, and the Asia-Pacific emerging market narrative.

Beyond the green bond – a transition story

Another key point of discussion was the need for financial instruments to be able to guide traditionally non-green industries towards greener practices. Mr. Zahn viewed the “transition bond”[3] discussion quite positively, noting that what he “really look[s] for is companies who aren’t doing as well and management has identified a problem, and that they need to make a change, and implement it. That’s where you generate alpha, and where you have the biggest impact on the climate”. Similarly, Ms. Reichelt advised to “let issuers label bonds whatever they want”, as a holistic view, with the understanding that these bonds provided signaling to the market and should be backed up with transparency and disclosure information and noting that hypothetical ‘transition principles’ may be more favourable. Transition strategies, including increasing transparency on a company’s ESG rating, were noted by Ms. Taneja as ways forward for industries considered “brown”. Moreover, the importance of investor reception and demand was highlighted, as investors have their own way of assessing green, including the “additionality”[4] of a sustainable finance instrument.

The future looks green, or something like that

With a focus on European momentum and new sustainable financial instruments on the horizon, it was predicted that green bonds will soon run parallel to conventional bonds, with more issuances, and a diversification of issuers. Through a “catalytic process” where investors seek information on an issuer’s broader ESG approach and impacts, and artificial intelligence making this information increasingly available, Ms. Reichelt anticipates that “investors will reward issuers being more transparent”, hypothesizing that there will be a price differentiation at some point.

With no lack of market demand for green bonds given high rates of oversubscription and a growing investor base, the appetite for future issuers and instruments remains as strong as ever.

[1] Find out more on ESG and Sustainability Linked Loans here: https://www.sustainalytics.com/sustainable-finance/sustainable-finance-products-for-banks-and-lenders/

[2] The International Capital Markets Association (ICMA) has issued the Green Bond Principles, Social Bond Principles, and Sustainability Bond Guidelines to guide issuers in use of proceeds that can be included as eligible projects in green, social and sustainability bonds. To find out more and read the principles, see: https://www.icmagroup.org/green-social-and-sustainability-bonds/

[3] There is no one global definition of transition bonds. The term generally refers to bonds issued to help companies that are not currently considered green to become more environmentally friendly, while typically maintaining their existing industry and supporting a shift to a low-carbon economy and technological shift (i.e. carbon capture and storage projects). A transition bond differs from a green, social or sustainability bond in that it aims to finance projects to help improve the efficiencies of existing capital projects that may not fully align with the ICMA principles or guidelines. See AXA Investment Managers Transition Bond Guidelines for more information.

[4] Additionality is generally accepted to mean the positive environmental, social or sustainability impact or benefit created as a result of the respective projects the bond finances beyond a ‘business as usual’ scenario. Other indirect additionalities of a green bond issuance relate to the increased transparency of project finance by the issuer, and strategic alignment and integration of sustainability into company business models. See Michaelsen’s article in Environmental Finance for more information.

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