Corporate ESG Monthly – 5 July 2021

05 July 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

  • The UK Government launches its Green Financing Framework. The HM Treasury and Debt Management Office (DMO) have published the UK Government Green Financing Framework which describes plans to finance expenditures through the issuance of Green Gilts and retail Green Savings Bonds. Funds will be allocated across green projects that include clean transportation, renewable energy, energy efficiency, pollution prevention & control, living & natural resources, and climate change adaptation. The inaugural Green Gilt bridges all three pillars of the UK Green Finance Strategy and is planned for September. Whilst, the Green Savings Bonds will go on sale later this year. Read more
  • G7 nations agree to boost climate finance at Cornwall summit. The G7 leaders have agreed to raise their contributions to meet an overdue spending pledge of $100bn a year to help poorer countries cut carbon emissions and adapt to global warming. After the summit concluded, Canada said it would double its climate finance pledge to USD 4.4 billion over the next five years and Germany would increase its pledge by 2 billion to 6 billion euros (USD 7.26 billion) a year by 2025 at the latest. There was a clear push by leaders at the summit last month to counter China’s increasing influence in the world, particularly among developing nations. The leaders signalled their desire to build a rival of Beijing’s Belt & Road initiative, but the details were few and far between. Some environmental groups were unimpressed with the pledges. Catherine Pettengell, director at Climate Action Network, an umbrella group for advocacy groups, said that the G7 had failed to rise to the challenge of establishing concrete commitments on climate finance. Read more.
  • EU targets greenwashing, financial risks in strategy draft. The EU will place tighter measures on banks and credit rating agencies in an effort to prevent “greenwashing” and to reduce systemic risks from climate change. The “Strategy for Financing the Transition to a Sustainable Economy”, due to be unveiled in early July, paves the way for financing activities (such as natural gas) during the transition to a lower-carbon economy. The latest plans have been received with mixed feelings in the EU parliament. Markus Ferber, a German conservative lawmaker, says the use of transition technologies would bring “more nuance” that will help it to be accepted by business. Bas Eickhout, a Dutch Green MEP, said it marked “backsliding” by the EU on its original green ambitions. Read more.

Disclosure

Reporting: ICMA publishes updates to Green Bond Principles to align to market best-practices

The International Capital Markets Association (ICMA) has published an update to its Green Bond Principles (the first since 2018) to reflect the standard market practice of green bond issuances. Similar updates were also published to ICMA’s Social Bond Principles and Sustainability Bond Principles, along with additional user guidance for the existing sustainable finance bond documentation. The strengthening of these sustainable finance bond standards reflects best practices, in particular, that recommendations for impact reporting, external review processes and more disclosure from issuers will further contribute to the standardisation of these products in the market. Read more.

Reporting: Auditors focusing more on ESG risks

As companies come under increasing pressure to deal with climate change and diversity, their internal auditors are putting more emphasis on making sure ESG reports are reliable. This is however proving challenging given the infancy of ESG reporting and the lack of a single authoritative standard. As a result, the Institute of Internal Auditors (IIA) recently wrote to the U.S SEC1 calling for uniform climate disclosure by companies. Read more

Reporting: How ESG reporting grew up

What started out as a way to measure the ESG performance of a company for the purposes of gauging risk, is now a major force driving business strategy. But, despite all of the momentum gained in recent years, Kenneth Pucker, Director at Berkshire Partners, advised that “reporting is not a proxy for progress” and argued that society needs to move far beyond the current system of voluntary disclosures and toward changes in regulations, investment incentives, and mindsets, to effect real change. Read more

Ratings: Raters of companies' green credentials need more oversight, UK watchdog says

The FCA2 notes that the varied methodology used by ESG Rating providers is leading towards lower correlation between them, which risks potential harm to market functioning. The ESG Ratings sector, which could be worth $1 billion this year, has seen a flurry of consolidation, with a number of the traditional credit rating agencies acquiring companies that provide ESG ratings. Consolidation may lead to greater correlation, but the FCA suggests tighter oversight is required through a globally applicable regulatory approach. Read more.

Ratings: Fitch Named Most Transparent Credit Rating Agency for ESG for Third Successive Year

Environmental Finance has awarded Fitch Ratings ‘the most transparent credit rating agency for ESG’ for the third year in succession. The judges highlighted the breadth of Fitch’s ESG Relevance Scores, and work undertaken on two degree centigrade scenario-based ESG Vulnerability Scores which notes creditworthiness to ESG-driven risks in a two degree warming scenario Read more.

Capital Markets

Primary Market

  • Repsol, Sustainability Linked Bond. An inaugural sustainability linked bond; dual tranche EUR 1.25bn transaction. The offering comprises of a EUR 650m 8yr tranche as well as a EUR 600m 12yr tranche. The KPIs4 refer to two targets: (1) to reduce its carbon intensity indicators by 12% by 2025 and (2) 25% by 2030. It’s worth noting that Repsol’s Transition Financing Framework is comprehensive, covering Green UoP, Transition UoP as well as Sustainability Linked Bonds. Read more. 
  • UCL, Sustainability Bond. University College London (“UCL”) launched a GBP 300m debut Sustainability Bond. The transaction marks the first public ESG-labelled bond from a UK university and was launched off UCL’s newly established Sustainability Finance Framework. The Framework will fund a range of Green and Social project categories such as modernising buildings as well as financing support of PhD level charitable research. Read more.

  • Enbridge, Sustainability Linked Bond. Enbridge, a Canadian Oil and Gas pipeline operator, issued their inaugural sustainability linked bond, a USD 1bn 12-year senior unsecured tranche. Targets related to carbon emission reduction as well as the representation of racial and ethnic minorities in its workforce. 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.

Investor Developments

A DWS5 sponsored report reveals the rise of ESG’s ‘S’ pillar in pension portfolios

66 per cent of pension funds surveyed intend to increase their allocations to ‘S’ pillar passive funds over the next three years. According to the report Covid-19 was cited by 59 per cent of respondents as a ‘key driver’ of their heightened interest in the ‘S’ pillar because of its growing materiality. Read more.

Four out of five investment decisions regularly incorporate climate-risk

The survey completed by Aviva showed that 80 per cent of asset managers ‘always’ or ‘often’ incorporate climate risk into investment decisions. Whilst, only two per cent stated they ‘never’ incorporated climate risk into their decision-making process. The survey also showed a notable increase in the proportion of asset managers signed up to the UN PRI6 between the 2019 and 2021 surveys, with 99 per cent of respondents now signatories compared to 83 per cent in 2019. Read more.

Institutional investors favour metal investment funds with stronger ESG credentials

 Our research highlights the growing importance of ESG credentials amongst institutional investors when choosing which metal funds to invest in, and also as a driver for proactively switching from current investment vehicles if their commitment to sustainable sourcing falls short.” Alexander Stoyanov, CEO of GPF7

It is expected that there will be an increase over the next 24 months in flows into funds that focus on ensuring metals are sourced in a responsible and sustainable way, away from funds that have weaker credentials. An exemplar of sourcing responsibly and sustainably is sourcing LBMA8-approved metal from producers and suppliers, who support the UN SDG9 and other global initiatives in sustainable development. Read more.

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Regular articles from us on market moving themes, and updates on what we are doing to further our ESG commitment.

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Glossary

1

SEC

Securities and Exchange Commission

2

FCA

Financial Conduct Authority

3

IFRS

International Financial Reporting Standards

4

KPI

Key Performance Indicators

5

DWS

Formerly Deutsche Asset Management

6

PRI

Principles for Responsible Investment

7

GPF

Global Palladium Fund

8

LBMA

London Bullion Market Association

9

SDG

Sustainable Development Goals

ESG/Sustainability


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