Private Finance ESG Monthly – 15 December 2021

15 December 2021

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ESG Private Capital Market Overview

2021 has been a year in which climate and social issues have featured prominently in the public domain, most notably in the lead up to COP26. Investors have clearly taken note of this; seen by an increased appetite in their alternative fund managers incorporating ESG considerations across both corporate policies and investment portfolios.

Whilst there has been progress on this front, it is clear that alternative managers are still in the early stages of their ESG journey, with European and Private Equity firms generally slightly ahead of the rest. One challenge that is being continually called out is the lack of quality data to support ESG policy administration, with climate risk and Diversity, Equity and Inclusion (DEI) factors, seeing an increased focus within the investment decision making process.

Alternative Managers, Status of ESG Journey (% of Survey Respondents)

Source: EY – 2021 Global Alternative Fund Survey

ESG Syndicated Lending Market Overview

Year-to-date (YTD) sustainability linked syndicated loan volumes totalled EUR 405 billion (as of November 2021). Volumes have been quieter in H2 relative to H1 but remain healthy, with activity remaining robust heading into December. Notable Financial Institution (FI) transactions in November included: ARA Asset Management’s $1billion sustainability linked loan that incorporates sustainability incentives on the Real Estate Investment Trusts (REIT) and funds that it manages.

Global ESG Syndicated Lending YTD (as of November 2021)

Source: Dealogic, 03/12/21

ESG Deal Activity

Triton Partners secured its first ESG-linked financing with a €1,455bn syndicated facility that included Key Performance Indicators (KPIs) on the implementation of Science Based Targets and Water & Waste Management programmes across the Triton Fund V portfolio. The facility was structured and arranged by RBS International.

Silbury Finance (backed by Oaktree Capital) worked with NatWest to convert its real estate development loans into transferable notes, which are financed by NatWest under an ESG repo transaction. The repo was structured so that if the underlying housing development achieved a BREEAM rating of ’Very Good’, NatWest would offer a discount on the repo exit fee to Silbury Finance that in turn would be passed on in full to the underlying borrower.

UK investment firm 3i Infrastructure announced the refinancing of what is now a £400m ESG-linked credit facility. The facility incorporates KPIs measuring performance against the areas of Greenhouse Gas (GHG) emissions, diversity, health and safety and renewable energy. NatWest Markets were lenders into the facility and acted in the capacity of joint sustainability co-ordinator.

The Saudi National Bank and Standard Chartered Bank signed a $250m repo agreement based on ESG principles. The transaction is a first for the Middle East and North Africa (MENA) region with the proceeds of the transaction being used to finance several renewable energy projects and green initiatives in Saudi Arabia and the wider Gulf region.

Algorithmic underwriting syndicate Ki entered into a $130m letter of credit agreement with a trio of banks where the pricing on the facility is linked to the ESG Rating of Ki’s investment portfolio.

ESG Pulse: A focus on ESG Securitisation

Key takeaways:

  • In 2021, Residential Mortgage-Backed Securities (RMBS) accounts for almost 75% of European ESG securitisation issuance. The trend is also confirmed at the thematic level with RMBS attributable to 69% and 80% of Green and Social issuances respectively.
  • Green securitisation assets have been featured in more securitisation instruments, including Asset-Backed Commercial Papers (ABCP), which has not been evidenced in social securitisation at this point in time.
  • The UK has been the most dynamic market since 2020, representing 44% of European issuance in 2021 and 72% in 2020, although Europe is growing quickly. Of particular note is Italy, which has issued several Asset-Backed Securities (ABS) this year with a focus on supporting the economic recovery from the pandemic (i.e. book of COVID recovery loans).
  • Upcoming ESG regulations on definition and reporting should support market growth in the coming years, addressing most issuers’ challenges, which include questions on the labelled nature of the assets in the pool vs future use of proceeds from the funds raised. The European Banking Authority (EBA) should release a discussion paper around setting up a framework for sustainable securitisations in Q1 2022.
  • Brass No.10 PLC, a social RMBS sponsored by Yorkshire Building Society and with a focus on prime owner-occupied residential mortgages, is the largest such transaction of 2021 (£1.7bn).
  • Activity has extended into the synthetic space with European manager Glenmont Partners securing its first ever green synthetic risk transfer (SRT) securitisation in Italy on a pan-European renewable energy portfolio worth EUR 1.7bn.
  • Of note is the increased inclusion of ESG factors into assessments at 91%, even though it may be early stages. As expected, ABS has seen greater successes versus Collateralized Loan Obligations (CLO) given the enhanced complexity of the assets and challenges collecting data.

European ESG Securitisation Issuance by Asset Class

Source: AFME, Climate Bond Initiative, Credit Agricole, S&P, and European Data Warehouse

European ESG Securitisation Issuance by Country

Source: AFME, Climate Bond Initiative, Credit Agricole, S&P, and European Data Warehouse

European Green Securitisation Issuance by Asset Class

Source: AFME, Climate Bond Initiative, Credit Agricole, S&P, and European Data Warehouse

European Social Securitisation Issuance by Asset Class

Source: AFME, Climate Bond Initiative, Credit Agricole, S&P, and European Data Warehouse

Does your firm incorporate ESG factors in its assessment of securitised products?

Source: PRI – ESG incorporation in securitised product: The challenges ahead – May 2021

Are investments rejected solely based on ESG criteria?

Source: PRI – ESG incorporation in securitised product: The challenges ahead – May 2021

Other major challenges to systematic ESG incorporation in securitised products

Source: PRI – ESG incorporation in securitised product: The challenges ahead – May 2021

Latest Climate and ESG Announcements by Sponsors

BlackRock mobilises $673M for the Climate Finance Partnership

The public-private finance vehicle is focused on investing in climate infrastructure across emerging markets in order to help accelerate the global transition to a net zero economy. A global consortium of 22 investors including governments, philanthropists, and institutional investors committed to the fundraise, which was oversubscribed and exceeded its target of US$500 million. Read more.

HSBC UK launches £500M Green SME Fund

The new £500m fund is available for businesses with a turnover of less than £25m and will offer 1% cashback on loans, starting from £1,000, to help SMEs invest in green activities. This is the first green offering for small businesses with a cashback proposal in the UK. To qualify for the cashback, evidence must be provided that the use of the loan proceeds meets HSBC’s Eligible Criteria for Green Activities, which have been independently reviewed by Sustainalytics. Read more.

EIB and Allianz back €500M public-private climate fund

The European Investment Bank (EIB) and Allianz Global Investors (AllianzGI) launched the Emerging Market Climate Action Fund (EMCAF) in a public and private partnership. EMCAF is a fund of funds that supports climate-focused investment funds and projects, active in emerging markets and developing countries. Its focus will be on climate mitigation, climate adaptation, and access to electricity. EMCAF investments are expected to support a significant amount of new clean energy capacity globally. EMCAF invests in specialized investment funds that could support projects like onshore windfarms and solar photovoltaic plants or small and medium sized hydropower plants. Read more.

SLGI Asset Management launches a new sustainable infrastructure private pool

The Pool, sub-advised by KBI Global Investors Ltd., is built to capture a trillion-dollar opportunity in global sustainable infrastructure, focusing primarily on water and food infrastructure and technological advances in clean, efficient, renewable sources of energy. Read more.

M&G’s Infracapital raises €1.5 billion to invest in sustainable European infrastructure

The strategy, which seeks to build, deliver and operate essential and sustainable infrastructure across Europe, has already allocated more than 50 per cent of the capital to invest in businesses that are either involved in energy transition and decarbonisation, or providing fibre connectivity to underserved regions. Read more.

Government and Regulatory Updates

16 November, Global. Basel Committee Public Consultation on Principles for the Effective Management and Supervision of Climate-Related Financial Risks. The first step by the Basel Committee towards setting up a global framework on how banks should manage risks. Through this public consultation, the Committee seeks to promote a principles-based approach to improving both banks' risk management and supervisors' practices related to climate-related financial risks. The principles seek to achieve a balance in providing a common baseline for internationally active banks and supervisors, while retaining sufficient flexibility given the evolving practices in this area. Read more.

16 November, UK. FRC Staff Factsheet: Climate-Related Matters. The Financial Reporting Council (FRC) published a new staff factsheet for FRS 102 reporters. This factsheet has been prepared to inform preparers of annual reports of climate-related matters they may need to consider when preparing financial statements and associated narrative reporting. This staff factsheet is a response to the commitments made in these publications to issue such guidance. Read more.

22 November, Global. IOSCO Call for Oversight of ESG Ratings and Data Product Providers. The International Organization of Securities Commissions (IOSCO), a global standard setter for securities regulation, published recommendations applicable to ESG Ratings and Data Product Providers, following public consultation earlier in the year. The recommendations include promoting more transparency regarding the methodologies that ESG ratings and data product providers use when developing their products. This ensures procedures for managing conflicts of interest are appropriate and improve communication channels between providers and entities covered by their ESG ratings or data products, without undermining their impartiality. Read more.

22 November, Eurozone. ECB: The State of Climate and Environmental Risk Management in the Banking Sector. The ECB published a first of its kind report assessing banks’ progress in meeting the ECB’s supervisory expectations set out in their Guide on climate-related and environmental risks for banks published last year. The ECB concluded that 1) No supervised bank is close to meeting all ECB expectations on climate and environmental risks; 2) Banks have developed plans to improve practices, but progress is too slow; 3) Supervisors have informed banks of main shortcomings, with full review of practices in 2022. Read more.

25 November, EU. European Single Access Point. The European Commission published a proposal to set up the European Single Access Point (ESAP) that will aim to provide a uniform platform to make all public corporate data centrally available in the EU, including sustainability data. This was designed to make the availability of financial and sustainability data better to facilitate reporting and lower its cost. Read more.

25 November, EU. Postponement of Reporting Requirements Under the SFDR. The European Commission officially postponed, for the second time, investment product level disclosure requirements under the EU Sustainable Finance Disclosure Regulation (SFDR) to January 2023. The decision was made due to the “length and technical detail” of the standards, requiring “additional time in the adoption process.” Investment managers in scope of the Regulation will be required to report on the “Principal Adverse Impact (PAI)” Indicators for the first time by June 30, 2023. Read more.

ESG Data, Articles & Market initiatives

  • Preqin ESG Solutions to Provide Comprehensive ESG Data & Scores on Private Companies. Preqin announced updates to its ESG Solutions, the only product suite to provide private market participants with a 360-degree view of environmental, social, and governance risk, impact and opportunity — across Limited Partners (LP) and General Partners (GP), down to portfolio level. The solution also provides asset-level data on ESG risk and impact across 124,000+ private companies. Read more.
  • London Stock Exchange Launches Voluntary Carbon Market Solution. The goal of the solution is to address two major challenges; (1) Access to capital at scale for the development of new climate projects worldwide; and (2) Primary market access to a long-term supply of high-quality carbon credits for corporates and investors. This will enable companies and investors to confidently augment credible net zero transition strategies, by financing additional projects to offset unavoidable carbon emissions during their path to net zero. Read more.
  • SBTi Launches New Foundations of Net-Zero for Financial Institutions Draft for Public Consultation. The foundations paper builds on the Science Based Targets initiative (SBTi) Finance Guidance and Criteria as well as the SBTi Corporate Net-Zero Standard by presenting guiding principles, definitions of net-zero for FIs, metrics for developing targets, tracking performance, and target formulation considerations such as fossil-fuel financing and use of carbon credits. The final Net-Zero for Financial Institutions Foundations paper will be released during Q1 2022. Read more.
  • PCAF launches a public consultation on a discussion paper covering capital market instruments. The Partnership for Carbon Accounting Financials (PCAF) discussion paper explains the key choices necessary to develop guidelines for facilitated emissions and describes the complex challenges around making those choices. The consultation is open until 17 December 2021. Read more.
  • RepRisk Opens up its Methodology to Inspire ESG Transparency. RepRisk’s publication of the methodology behind its ESG data is hoped to encourage competitors to follow suit and bring greater transparency to the sustainable investment space. Read more
  • Arabesque issues 'ESG Book' with support from FIs, investors and businesses. A global alliance of leading financial institutions, investors and businesses have today announced the launch of ‘ESG Book’, a new central source for accessible and digital corporate sustainability information, with the aim of shaping the future of ESG data. Read more
  • Sustainable Finance in Europe: Regulatory State of Play. A new report by the Association for Financial Markets in Europe (AFME) and Linklaters provides a practical guide to the significant number of initiatives which make up the regulatory framework for sustainable finance in the EU, UK and Switzerland. It highlights how the banking sector is impacted and makes recommendations to further the goal of developing sustainable finance in Europe. Read more
  • ISDA white paper on Regulatory Considerations for Sustainability-Linked Derivatives (SLDs). The International Swaps and Derivatives Association (ISDA) white paper analyses two categories of SLDs in the context of the regulatory frameworks established for derivatives in the EU, UK and US following the 2008 financial crisis. The paper considers: 1) Whether SLDs could be classified as swaps under US regulations and/or over-the-counter (OTC) derivatives under EU and/or UK regulations and, if so, what exemptions or exclusions might be available; 2) The impact of sustainability-linked cashflows on derivatives that would otherwise be excluded or exempt from certain requirements under those regulatory regimes; 3) Compliance issues for market participants to consider if SLDs are classified as swaps and/or OTC derivatives contracts. Read more
  • ISDA white paper on Legal Implications of Voluntary Carbon Credits (VCCs). The white paper investigates the legal treatment of VCCs and considers certain other aspects of VCC transactions (such as when they might be regulated as derivatives). The paper also sets out recommended steps that can be taken to further develop legal certainty in VCCs at both a global and jurisdictional level. Read more

For those looking to discuss any of the above further, please reach out to our authors:

*For any unfamiliar terms used within this article please refer to our Insights glossary.

ESG
ESG/Sustainability


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