Corporate ESG Monthly – 5 May 2021

05 May 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

  • UK enshrines new target in law to slash emissions 78% by 2035. The UK government has announced a plan to reach 78% reduction in emissions by 2035, building on the 68% reduction target it will need to meet by 2030 to comply with its Sixth Carbon Budget. The UK’s new goal will require policy measures that not only green the entire UK power infrastructure but require a rapid shift in transportation and home heating. to meet its new target, the UK’s electricity production will need to be 100% zero carbon by 2035. Read more.
  • The Glasgow Finance Alliance for Net Zero (GFANZ) launches. The Alliance, launched ahead of COP26 in November, comprises of 160 companies, from 23 countries, including the 43 members of the Net Zero Banking Alliance, with a total net worth of $70 trillion. GFANZ members have signed up to a number of commitments, including: 1) setting targets to reduce the carbon content of their assets by 2030, in line with an overall goal of net zero emissions by 2050; 2) devising “credible plans” for reducing their investment in high-carbon assets; 3) diverting their investment towards low-carbon infrastructure and technologies; and 4) improving data gathering. Arguably the most important undertaking, is the action taken in response to concerns that some financial service companies are claiming to be ‘Paris compliant’ without having taken any concrete measures in that regard. Alliance members will seek to prevent banks from “greenwashing” their commitments. Read more.
  • The EU Sustainable Finance Action Plan – not just another piece of regulation. Coming into force over the course of 2021, the EU’s Sustainable Finance Action Plan (“SFAP”) represents one of the most impactful pieces of regulation to hit the investment management industry since MiFID II. Masja Zandbergen, Head of ESG Integration at Robeco says “The financial industry will need to become very specific on how environmental and social issues are promoted, the most immediately impactful element being the SFDR1”. Alongside the application of SFDR requirements (both levels 1 and 2) the EU SFAP also covers fund compliance with the EU Taxonomy. Read more.

Disclosure

Reporting: EU extends mandatory sustainability reporting to 50,000 companies

The EU Commission has strengthened the rules under the Non-Financial Reporting Directive (NFRD), requiring companies to disclose information on social and environmental challenges. This latest proposal, called the Corporate Sustainability Reporting Directive (CSRD) will extend NFRD sustainability reporting requirements to all large and listed companies, meaning that nearly 50,000 companies in Europe will now need to follow them (vs. 11,000 companies under the current regime). The goal is to get sustainability reporting “on an equal footing with financial reporting”, as explained by Mairead McGuinness, the EU’s financial services chief, in a speech at the release of the proposal. Read more.

Reporting: To accelerate climate action, U.S. regulators must coordinate with global peers

The Biden Administration has pledged to use the “whole of government” to combat climate change and plug the progress gap vs. global peers, following the opposition posed by the prior administration. Last month, the SEC2 announced plans to update its guidelines on climate risk disclosures and created a taskforce on climate-related compliance. The Fed, SEC and Treasury department all acknowledge that climate risks are an area of acute focus with current climate disclosures not providing sufficient decision-useful information. The TCFD3 disclosures and the IFRS4 Sustainability Standards Board present likely potential solutions. Read more.

Ratings: ESG ratings providers – regulation horizon

In the UK

Mark Manning, FCA Technical Specialist on Sustainable Finance and Stewardship, is reported to have announced that the FCA is planning to scrutinise the role and transparency of ESG ratings providers in the UK, as it looks to tighten regulations for sustainable investors. Given the low levels of correlation across ESG ratings providers, coupled with the unsolicited nature of the majority of ESG ratings, there is a growing focus on investment managers to verify the information detailed in ratings scorecards. The FCA has previously indicated that it expects fund selectors to avoid using ratings mechanistically without understanding the methodology used by the ratings providers. Read more.

In the EU

There are similar plans afoot in the EU - in January 2021, the European Securities and Markets Authority (ESMA) published a letter to the European Commission sharing its views on the main challenges with regard to ESG ratings and assessment tools, outlining a potential future legal framework. ESMA suggests that the Credit Rating Agencies Regulation could provide a starting point for any framework given the parallels between the processes of ESG and credit rating agencies. It is expected that the European Commission will address ESMA's concerns in the Renewed Sustainable Finance Strategy, which is expected to be published in May 2021. Read more.

Capital Markets

Primary Market

  • Aeroporti di Roma, Sustainability-linked Bond. An inaugural EUR 500m 10-year sustainability-linked bond (SLB), the first SLB transaction in the airport industry. The SLB has three targets of which one is specific to the airport industry: 1) greenhouse gas emissions reductions across Scope 1 and 2; 2) Airport Carbon Accreditation (ACA) of 4+; and 3) reducing Scope 3 emissions per passenger by 7% by 2027. Read more.
  • FedEx, Sustainability Bond. An inaugural EUR 600m 8-year sustainability bond marketed in the Euro market, despite the issuer being a US delivery services company. The framework covers a wide range of green and social projects such as clean transportation (ground transportation and sustainable aviation), socioeconomic advancement and empowerment. Read more.
  • Pfleiderer, Sustainability-linked Bond. A landmark EUR 750m 5-year sustainability-linked floating rate and fixed rate note, that marks the first floating-rate SLB note denominated in euros. The transaction has two targets related to its Scope 1 and Scope 2 emissions and the use of recycled wood. According to the SPO5 provider, the targets set by Pfleiderer are among the top three most ambitious targets within the sector. 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

UN Development Programme (UNDP) and the global investors launched ‘SDG Investor Platform’

The UNDP’s new SDG Investor Platform provides the critical data, insights and tools that investors need to drive new levels of capital towards the Sustainable Development Goals. The SDG Investor Platform will also serve as a hub for SDG-enabling investment where many ‘knowledge products’ will live. These include: the SDG Impact Standards for Private Equity, Bonds and Enterprises, and an online free Impact Management and Measurement Training - designed with Duke University, available in Q4 2021. Read more.

Aviva call on global bodies (such as IMF6, World Bank) on climate change

In a white paper, called ‘Harnessing the international financial architecture to deliver a smooth and just transition’, Aviva Investors sets out ideas, including encouraging the Organisation for Economic Cooperation and Development to bring forward proposals for convening an IPCF7. The paper invites the IMF to clarify its mandate to promote sustainable growth and financial stability, including the consideration of climate risk; and encourages governments and central banks to activate ideas from the Coalition of Finance Ministers for Climate Action and Network for Greening the Financial System (NGFS). Read more.

PIMCO launches ESG version of $68bn Income fund

The PIMCO fund will pursue a global, multi-sector and flexible approach while investing with strong ESG credentials. Read more.

Regular updates and tools to keep you informed

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

SFDR

European Central Bank

2

SEC

Securities and Exchange Commission

3

TCFD

Task Force on Climate-related Financial Disclosures

4

IFRS

International Financial Reporting Standards

5

SPO

Second Party Opinion

6

IMF

International Monetary Fund

7

IPCF

International Platform for Climate Finance

8

IG

Investment Grade

 

ESG


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