Corporate ESG Monthly – 12 January 2021

12 January 2021

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Breaking down trending ESG trades & themes to help Corporates get ahead of the latest issues shaping the market.

Institutional Developments

  • FCA introduces a rule to enhance climate-related disclosures. The FCA has introduced a new rule, alongside some guidance, that promotes better climate-related financial disclosures for UK premium listed commercial companies. Companies will need to include a compliance statement in their annual financial report, stating whether they have made disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and if not provide an explanation as to why. The rule will apply for accounting periods beginning on or after 1 January 2021, meaning the first annual financial reports subject to this rule will be published in Spring 2022. Read more.
  • A “Brown” Taxonomy could make it easier to target unsustainable activities in a more impactful manner. According to research produced by Fitch Ratings, developing a list of "unsustainable" activities (or “brown” taxonomy) could not only help standardise the exclusion policies and the assessment approach of transition risk within financial institutions, but could also facilitate the availability of more consistent data. The European Commission (EC) is exploring the development of said list, following the creation of the EU Taxonomy for environmentally sustainable activities. Despite gaining support from some financial authorities and regulators, many financial institutions and industry associations have voiced concerns re the idea of a brown taxonomy; it could deter engagement with high-impact sectors on the low-carbon transition and influence the application of penal or "malus" capital charges in prudential regimes over time. Read more.
  • The Brexit deal could force UK and EU to stick to tougher climate targets. According to some experts, the Brexit deal is the first trade agreement to mark the climate crisis a ‘make-or-break issue’. The pledges outlined in the text of the new agreement, state that “each party reaffirms its ambition of achieving economy-wide climate neutrality by 2050”. The text of the deal indicates that such a breach could lead to “immediate tariff consequences, subject to an expert and tribunal process”. It also states that not taking sufficient action to reach net zero would be in direct breach of the trade agreement. This makes climate change a priority issue in the UK and EU trading relationship. There are other sections of the agreement however, that are less encouraging – for example, the deal appears to make no assessment of how changes to trade could impact existing environmental protections in the UK. Read more.

Disclosure

Reporting: The FSB1 encourages the IFRS2 Foundation and authorities to use the TCFD’s recommendations

The FSB created the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 to develop a set of voluntary disclosure recommendations for use by companies. And, in 2020 the IFRS Foundation produced a consultation paper to determine whether they should play a role in establishing global sustainability standards. Although at a formative stage, the standards could potentially put financial and non-financial reporting on a similar footing.  Read more.

Reporting: As intangible assets grow, so does the role of ESG standards

Modern accounting standards have not kept pace with the global evolution from an industrial economic base to services and knowledge. Intangible assets such as human capital, intellectual property and efforts made to ensure sustainability, are identified as material ESG issues for many industries. Clear and meaningful ESG disclosures in this regard have been somewhat hampered by the lack of standardisation in reporting guidelines. However, frameworks are converging which look set to introduce much called for harmonization. Read more.

Ratings: Dutch and French regulators in joint call for ESG rating regulation

The demand for ESG data and services is surging among investors and asset managers looking for sustainable investments. As a result, the AFM3 and AMF4 have suggested that sustainability-related service providers (SSPs) such as ESG ratings must be placed under the supervision of the European Securities and Markets Authority (ESMA). According to the joint paper, a lack of transparency on methodologies of SSPs and risk of conflicts of interest, will lead to potential misallocation and missed opportunities. Read more.

Ratings: What we talk about when we talk about ESG

At the beginning of 2020, before the breakout of COVID-19, the performance of the S&P 500 ESG Index largely matched that of the S&P 500 Index upon which it is based. However, as 2020 progressed and the infection rate rose, the index performed incrementally better. Now, with estimated $40.5 trillion invested globally in 2020, ESG has moved from the margins to the mainstream. And, as a result, the value of understanding complex ESG metrics and measures has increased and it has become an important component of the corporate toolkit. Read more.

Ratings: How analysts quantify ESG values

According to Diederik Timmer, executive vice president of Sustainalytics, analysts “look at a company’s business models and where they operate geographically and assess what ESG factors they’re exposed to”.

ESG metrics provide a useful assessment of intangible asset risk, but the marketplace is viewed as fragmented with multiple proprietary approaches. It is therefore important to access a broad view across agencies to help inform ‘relative’ ESG positioning. Read more.

Capital Markets

Primary Market

  • PKN Orlen, Sustainability-linked Bond. The transaction is the second in the bond space to link the coupon of the instrument to an external ESG rating score, following Veritas SPA in November. The interest may be increased by up to +10 bps per annum depending on the level of ESG rating. Read more.
  • Samhallsbyggnadsbolaget i Norden, Social Bond. An inaugural EUR 500 million hybrid Social Bond. SBB has expanded its framework from green to sustainable and changed its second party opinion provider in the process. Read more.
  • Telecom Italia, Sustainability Financing Framework. Telecom Italia introduced its Sustainability Financing Framework to investors on December 14 (2020) and, was one of the first (non-financial) corporates to embed an explicit category of Covid-19 response activities: enhanced broadband connectivity, distribution of digital tools, support of frontline healthcare workers. Read more.

Secondary Market

For further analysis and information on the Secondary Market, please take a look at the full monthly newsletter on Agile Markets. If you do not have access to Agile Markets, please contact us here.

Regular updates and tools to keep you informed

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Or, for Corporates looking to discuss any of the above further, please reach out to our authors:

Glossary

1 FSB Financial Stability Board
2 IFRS International Financial Reporting Standards
3 AFM Autoriteit Financiële Markten
4 AMF Autorité des marchés financiers
5 ICMA International Capital Market Association
6 IG Investment Grade
ESG/Sustainability
ESG


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