ESG investor scrutiny and the impact on corporates: Benefits of comprehensive ESG disclosures, and structural innovations to enhance credibility

22 December 2021

Dr Arthur KrebbersHead of Corporate Climate and ESG Capital Markets

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Dan BresslerVice President, Sustainable Finance Corporates

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Dean ShahfarVice President, Sustainable Finance, Debt and Financing Solutions

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During the course of this series*, we’ve outlined some of the ways corporate issuers can ensure they are disclosing material and comprehensive ESG information that investors and other stakeholders can use to shape their decision-making. But, with greenwashing as a reputational risk not going away and investors aiming to position themselves as ‘best in class’ in ESG investing, it’s equally important for investors to scrutinise their own investment process as well as any third-party information; ensuring the front and back of house align, as stakeholders will look for gaps or flaws in any claims being made, especially around what investors hold in ‘ESG funds’. Additionally, regulators will continue to focus on ESG from a compliance and legal perspective, increasing the pressure on issuers to avoid regulatory breaches and corresponding reputational risks.

Aside from mitigating risks and fulfilling investor demand for comprehensive ESG data, there are other advantages corporates can realise by increasing and improving the granularity and quality of their disclosures. We take a closer look at these benefits in this article, the final instalment of the ESG Investor Scrutiny series.

Benefits for treasury teams

Two clear benefits for corporate treasury teams, that integrate sustainability in their operations are: better pricing for their bonds and improved financing overall.

For example, corporates can expect stable secondary performance as investors tend to hold on to sustainability-labelled debt. When sustainability-labelled debt is issued the whole credit curve becomes marginally less volatile. In addition, sustainability-labelled debt currently leads to improved market access as there is more investor demand than supply. Orderbooks tend to be larger and more diversified, and since 2020 we’ve seen these bonds, on average, achieve higher oversubscription rates than conventional bonds. Issuers can continue to see these and the ‘greenium’ benefits (discussed later in this article) if they take into account the factors that investors and other stakeholders will consider in evaluating issuers and bonds; besides the fact that it is sustainably-labelled debt.

The consistency of a ‘greenium’

While the concept of a ‘greenium’ for sustainably-labelled debt is not new, it remains evident as investors continue to show willingness to pay for bonds with clear sustainability benefits. Our recent investor survey showed that in 2021 even more investors said they expect to pay a ‘greenium’ compared to the number in 2019: over 90% believe that sustainability-labelled debt bonds will trade with either a modest or meaningful premium – in 2019 that number was only 52% (Figure.1).

Figure 1: Investor Outlook on Greeniums

Source: NatWest Markets ESG Global Investor Survey 2021

There are many factors that contribute to the greenium, beyond what is simply included in the bond structure, such as the key performance indicators (KPIs) or eligible green project categories. As mentioned in our previous article, the greenium also takes into account issuer sustainability performance overall, including emissions reporting (with a focus on Scope 3), carbon targets, ESG ratings compared to peers, a credible decarbonisation strategy as part of high-quality sustainability disclosures and reporting. Some other factors that contribute to a greenium (debut offerings are one example) will be less under the control of the issuer, versus the overall sector appetite from investors.

Structural innovations to further integrate sustainability into debt financing

Along with disclosures that drive the greenium, issuers can also consider including or developing structural innovations to highlight their commitments. Many of these innovations currently focus on sustainability-linked bonds (SLB), which have been linked more frequently to accusations of greenwashing. The accusations are due to the fact that the proceeds of such bonds are used for general corporate purposes, and there is room for subjectivity around determining whether a KPI is material or if targets are appropriately “stretching”. 

What could these structural innovations look like? We’ve seen an issuer include language in their framework so that their entire SLB book would always be updated to their most ambitious targets. This is a unique but interesting way to align all sustainable debt financing to the evolving nature of company sustainability strategies. While the clause is not legally binding, and the actual implementation mechanism is not detailed, it should streamline SLB reporting for an issuer through a consistent set of targets and aligns with the reality that an issuer’s carbon pathway will continue to evolve. Additionally, our most recent sustainability-linked bond watch note showed that total cost to the issuer, if the target is not met, should be at least 50 basis points (half a percent). However, that number doesn’t take into consideration how far the issuer has progressed in meeting the target, or even relate to its pricing curve. Corporates should carefully consider how to best structure these trigger events in order to better align with existing data, like their current progress on those targets.

There are also ways to “strengthen” use-of-proceeds bonds (UoP) by a) restricting the amount that can be allocated to refinancing, b) limiting the look-back period, or c) being transparent and prescriptive about the traits that a project would need to exhibit to qualify. This latter point will become more important as the EU Green Bond Standard is further developing with a greater focus on facilitating finance aligned with the environmental objectives set in the European Union, and also highlighting the importance of managing social risks, for example through implementing relevant ‘do no significant harm’ (DNSH) criteria.

Companies can also consider developing targets related to their overall sustainable financing goals relative to their total funding need. These holistic commitments to sustainable financing put sustainability at the heart of strategy and give investors and other stakeholders a clearer understanding of the roadmap, and where issuances fit in. Some issuers have developed holistic sustainable finance frameworks, sometimes referred to as “hybrid” frameworks, that include both KPIs and eligible projects, to be able to efficiently and more easily issue sustainably-labelled debt in a variety of formats.

The innovations described are all linked to the key conclusions we’ve drawn in our previous articles in this series. Corporate issuers must ensure that sustainability is already integrated within the company, so that material aspects of the business and related sustainability goals are aligned for successful financing. Furthermore, while the framework is one such way to engage with investors and stakeholders, corporates cannot expect this to be the only medium for engagement – issuers should therefore endeavour to be as transparent as possible regarding their sustainable finance goals, current limitations and future plans.

Outlook for 2022

At NatWest, we’re always exploring ways to enhance sustainable finance formats in order to ensure that corporate issuers can fully realise the benefits of these products.

We’ve seen – and expect to continue to see – a focus on “greenwashing”. So, the onus will be put on corporates to ensure they are best positioned through their ESG ratings, sustainability strategy and financing framework, and issuance of specific disclosures, to continue to be considered for investment by the ever-growing swath of ESG investors. While this requires time and resources, the following 5 recommendations can help issuers to address this challenge efficiently:

*Other articles in the series


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