Private Finance ESG Monthly – 15 November 2021

15 November 2021

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ESG Private Capital Market Overview

European Private Market ESG assets have steadily grown in the last 5 years (more than doubling in size) and are expected to accelerate significantly in the next 5 years driven by changes to regulation and societal norms. Depending on one’s outlook, the expected size of the market by 2025 ranges between €776bn and €1,210bn. Infrastructure is expected to be a significant driver of growth on the back of its key role in the decarbonisation story. Private Debt, a traditional laggard in growth, is forecast to see increased appetite in future on the back of growing popularity of ESG-linked lending. Furthermore, the growth of ESG in Private Markets will be driven almost exclusively by the launch of new funds as opposed to fund conversions (as is the case with more traditional assets).

ESG Reboot: European Private Capital Assets Under Management (AuM)

Source: PwC Global AWM Market Research Centre, Preqin

ESG Syndicated Lending Market Overview

Year-to-date (YTD) sustainability linked syndicated loan volumes totalled EUR 276 billion (as of July 2021). The ramp up in March of global sustainability linked lending activity was primarily driven by North America – notable transactions in this month were Intel Corp ($5bn) and BlackRock ($4.4bn).

Global ESG Syndicated Lending YTD (as of July 2021)

Source: Dealogic, 25/10/21

ESG Deal Activity

Sustainable financing in the Financial Institution (FI) and Real Estate Investment Trust (REIT) space has seen activity across all of Europe, Americas and Asia. Notable transactions include the sustainability linked loan by leasing company Modulaire Group for £1.4bn that includes an overall margin adjustment of +/- 7.5bps if Scope 1 & 2 targets are met. Elsewhere, Trinity Acquisition plc refinanced an existing $1.5bn Revolving Credit Facility (RCF) into a sustainability-linked facility.

Earlier in August, Bayfront Infrastructure Management launched an Infrastructure Asset Backed Securitisation (IABS) that included a sustainable tranche (containing either social or environmental assets) worth c.$185m. The sustainable tranche was structured in accordance with Bayfront’s sustainable finance framework and gives access to 27 project and infrastructure loans diversified across 13 countries and 8 industry sub-sectors.

In October, Atlantic Asset Securitization LLC issued the first green asset backed commercial paper note, indexed to the Secured Overnight Financing Rate (SOFR), to finance Electric Vehicles (EV) and hybrids in auto portfolios and solar loan transactions.

Europcar Mobility Group converted their €1.7bn fleet financing securitisation programme into a sustainability-linked securitisation programme whereby an interest rate step up or step down mechanism is applied depending on Key Performance Indicators (KPIs) having been met on the % of green vehicles (<50g CO2 / km) within the fleet.

EDF signs first corporate ‘green’ repo agreement whereby EDF will apply the proceeds to the same eligible categories included within its green bond framework. The repo has an initial tenor of six months and will be collateralised using government bonds held by EDF in its liquid bond portfolio.

UK affordable housing association Sage Housing has raised £280m from a sustainability bond, believed to be the first social housing securitisation in this format in Europe. Eligibility on the allocation of proceeds is determined by both ‘green’ and ‘social’ criteria – the portfolio of 1,712 affordable housing properties in England will also have either an ‘A’ or ‘B’ EPC rating.

ESG Pulse (Greenhouse Gas Emissions Focus)

Key takeaways:

  • Scope 3 emissions feature prominently (relative to overall supply chain emissions) across most sectors – highlights the necessity for incorporating Scope 3 into net zero ambitions.
  • Globally, 44% of all Private Equity firms measure their operational carbon footprint; 48% measure their supply chain footprint, with 50% measuring carbon footprint of investments. German Private Equity firms perform well with 82% committing to providing transparency in future (compared to only 37% of UK&I Private Equity firms making the same commitment).
  • There has been a significant increase in financial institutions committing to Science Based Targets in 2021 – with notable participation from European companies versus the rest of the world.
  • Financial institutions have been one of the earliest adopters of Science Based Targets (making commitments since 2015) but only 3% of these FIs have validated targets.

Split of Scope 1, 2 and 3 Emissions by Industry Sector

Source: Accenture

Carbon foot printing across Private Equity

Source: Apex Group
Source: Apex Group

Deep Dive – Science Based Targets Initiative (SBTi)

Source: SBTi, NatWest Analysis
Source: SBTi, NatWest Analysis
Source: SBTi, NatWest Analysis
Source: SBTi, NatWest Analysis

Latest Climate and ESG Announcements by Sponsors

EQT AB Group launches impact-driven longer-hold fund

The EQT Future fund will have a target size of EUR 4 billion and a portion of its carried interest will be linked to achieving portfolio-level impact KPIs, including reduction of greenhouse gas (GHG) emissions using the Science Based Targets. The EQT Future fund will invest in mature, high-quality companies with market-shaping impact potential and where transformation requires a longer ownership horizon. Investments will be made in line with three key objectives i) Planet (safeguard resources and protect our climate), ii) People (improve mental and physical health), and iii) Prosperity (create equality of opportunity). Read more.

Actis focus on Energy Transition

Actis, a global investor in sustainable infrastructure, announced it has completed fundraising for Actis Energy 5 (“AE5”), significantly exceeding its $4 billion target.  The Fund has already allocated capital to c.$4 billion of Energy Transition opportunities through control investments in power generation and distribution businesses. Read more.

Credit Suisse and Blackrock Partnership on Health and Wellbeing

Credit Suisse and BlackRock launch Private Equity Impact Fund focusing on Health and Wellbeing. The Health and Wellbeing Fund is designed to tap into a rich set of opportunities across four sub-themes, including physical health and wellbeing, mental health and development, nutrition and resources, and financial health. Read more.

Tikehau Capital Committed to Climate Action

Tikehau Capital announces its ambition to manage at least €5 billion of assets by 2025 dedicated solely to combatting climate change. As part of Tikehau Capital’s continued commitment to furthering a positive climate agenda, the Group has also today launched the Climate Action Centre, a platform that will harness financial innovation and focus on decarbonisation, biodiversity, sustainable agriculture and food, the circular economy and sustainable consumption. Read more.

EQT becomes the first private markets firm to set science-based targets (SBT)

Looking ahead to 2030, EQT is committing to: reducing EQT AB’s direct emissions by 50 percent, reducing EQT AB’s indirect emissions from business travel by 30 percent, ensuring 100 percent of the EQT portfolio companies (excluding EQT Ventures*) will have their own SBTs validated by 2030, 10 years faster than required by SBTi, reducing indirect emissions in the EQT Real Estate I and II funds by 55 percent per square meter floor area. EQT has set interim targets and will publicly report progress annually with 2019 as a base year. Read more.

M&G Investments’ latest SDG Reckoning report reveals that the world is on track to deliver only six of the 17 United Nations Sustainable Development Goals (UN SDGs)

M&G’s second SDG Reckoning report has assessed all 17 SDGs – from a general perspective and through an impact investing lens – using a scale of 1 to 10 to assess progress since last year’s inaugural rankings, to determine whether the world has started to follow through on its pandemic-related sustainable recovery pledges. Read more.

Government and Regulatory Updates

7 October, Global. G20 Sustainable Finance Roadmap. G20 published a roadmap to promote five key areas in sustainability: 1. Market development and approaches to align investments to sustainability goals; 2. Consistent, comparable, and decision-useful information on sustainability risks, opportunities and impacts; 3. Assessment and management of climate and sustainability risks; 4. Role of International Financial Institutions (IFIs), public finance and policy incentives; 5. Cross-cutting issues. Read more.

18 October, EU. European Central Bank (ECB) 2022 Climate Stress Test. The ECB announced the details of its 2022 Climate Stress Test, the goal of which is to identify vulnerabilities, industry best practices and the challenges faced by banks. The exercise will also help enhance data availability / quality and allow supervisors to better understand the stress-testing frameworks banks use to gauge climate risk. Read more.

18 October, UK. Greening Finance: A Roadmap to Sustainable Investing. The UK Government published a policy document ‘Greening Finance: A Roadmap to Sustainable Investing’. The document sets out the government’s long-term ambition to green the financial system and align it with the UK’s world-leading net-zero commitment. It focuses on enhancing the availability of decision-useful information on sustainability which will be delivered through new economy-wide Sustainability Disclosure Requirements. Read more.

19 October, UK. Net Zero Strategy: Build Back Greener. The UK Government published the long awaited Net Zero Strategy: Build Back Greener. The document sets out policies and proposals for decarbonising all sectors of the UK economy to meet its net zero target by 2050. It includes: decarbonisation pathways to net zero by 2050, including illustrative scenarios; policies and proposals to reduce emissions for each sector; cross-cutting action to support the transition. Read more.

21 October, UK. Climate Financial Risk Forum’s updated climate risk guides. The Climate Financial Risk Forum published its second set of guides to help the financial industry effectively manage climate-related financial risks. Written by industry, for industry, the guides focus on risk management, scenario analysis, disclosure, innovation and climate data and metrics. Read more.

21 October, US. FSOC Report on Climate-Related Financial Risk. The US Financial Stability Oversight Council (FSOC) released a Report on Climate-Related Financial Risk in response to President Biden’s Executive Order identifying climate change as an increasing threat to financial stability and providing concrete recommendations to accelerate existing efforts on fighting the threat. Read more.

22 October, EU. Technical standard on taxonomy alignment under SFDR. The European Supervisory Authorities (European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and The European Securities and Markets Authority (ESMA)) published their final report on a technical standard covering requirements of Art. 8, 9 and 11 of the EU Sustainable Finance Disclosure Regulation (SFDR), including disclosures of Taxonomy-alignment at financial product level. The Commission will soon adopt a legal act bundling all technical standards under SFDR into one, applying from July 2022. Read more.

27 October, EU. Climate risk in Prudential Regulation proposals. The European Commission published its Banking Package 2021 (CRR3 proposals) to complete the implementation of the Basel III reforms. Sustainability is one of the core three pillars of the package. The new rules will require banks to systematically identify, disclose and manage sustainability risks as part of their risk management. Read more.

28 October, UK. Climate Change Adaptation Reports - FCA, PRA and TPR. UK financial regulators, the FCA, PRA, TPR and FRC, published a joint statement on the publication of Climate Change Adaptation Reports with the aim to ensure that the risks from climate change and the opportunities from the transition to a net-zero economy are being identified and proactively managed across the financial sector. The statement was accompanied by the publication of actual reports by the FCA, PRA and TPR. Read more.

2 November, Global. IOSCO recommendations to help address greenwashing concerns. IOSCO published a report with recommendations about sustainability-related practice in the asset management industry in the attempt to set measures to prevent greenwashing. The report focuses on several investor protection issues and covers five areas: asset manager practices, policies, procedures and disclosure; product disclosure; supervision and enforcement; terminology; and financial and investor education. Read more.

3 November, UK. Mandatory transition plans for financial institutions. UK Government announced that UK financial institutions will be mandated to publish a firm-level transition plan setting out how they will decarbonize in line with the UK net zero commitment on a comply or explain basis. A Transition Plan Taskforce will be set up to develop a “gold standard” for the plans and associated metrics. A transition pathway for the financial sector will be published in 2022. Read more.

3 November, Global. Launch of International Sustainability Standards Board. The International Financial Reporting Standards (IFRS) Foundation has officially set up the International Sustainability Standards Board (ISSB). The ISSB will sit alongside the IASB and will develop harmonised, global ESG disclosure standards to meet investors’ information needs in this space. A technical group that was set up earlier published two prototypes of the future standards: one on climate-related disclosures and the other on general sustainability disclosure requirements. The first set of international standards is expected to be formally adopted in 2022. Read more.

ESG Data, Articles & Market initiatives

  • Moody’s ESG Solutions today launched EU Taxonomy Alignment Screening, a new data solution to help market participants meet the disclosure requirements of the European Union’s Taxonomy regulation. Moody’s EU Taxonomy Alignment Screening provides users with comprehensive data across the key components of the regulation: Substantial Contribution, Do No Significant Harm and Minimum Social Safeguards. Today, the screening covers all 100 of the activities outlined in the EU Taxonomy, and this will continue to expand as the regulation evolves to cover more environmental and social objectives. The new solution complements the SFDR Principle Adverse Impacts (PAI) Dataset, which Moody’s released in June 2021 to help market participants meet the requirements of the EU’s Sustainable Finance Disclosure Regulation. Read more.
  • Arabesque Launches New Data Solution for SFDR Regulatory Disclosure. The ‘SFDR Data Solution’ is a toolkit developed for asset managers and investment professionals to ingest data needed for SFDR reporting. The solution maps S-Ray’s suite of proprietary raw data metrics covering more than 4,000 entities to the 47 corporate-level PAI indicators required by the SFDR, resulting in over 120 S-Ray raw sustainability data indicators that can be delivered at an individual entity and portfolio-wide level. Covering all the mandatory SFDR metrics as well as the majority of the opt-in indicators, the tool provides investors with the necessary data points for complete SFDR reporting. Read more.
  • Finance for Tomorrow launched in March 2021. A Paris Financial Centre Task force has published a report defining Impact Finance. 80 institutions from the Paris financial centre within four working groups focusing on (i) the definition, (ii) the measure, (iii) the conditions for development and removal of barriers, and (iv) the international promotion of the French vision of Impact Finance. The first group defines ‘Impact Finance’ as an investment or financing strategy that aims to accelerate the just and sustainable transformation of the real economy, by providing evidence of its beneficial effects; based on the pillars of intentionality, additionality and impact measurement. Read more.
  • Private equity sponsors and lenders align to standardise ESG disclosure during due diligence. The Principles for Responsible Investment (PRI) has been working to facilitate disclosure and create new norms for proactively sharing ESG information among private equity and private credit investors. The effort centres around a new general partner-level ESG standard due diligence template, which aims to standardise the ESG information shared during the investment process and integrates existing ESG standards and frameworks. The template will be made available as a public good on the PRI website in early 2022. Read more.
  • Robeco. “Boiling Point: global growth, climate change and the increasing pressure for water resources”. The extent and impact of the water crisis is not uniform: the developing world suffers disproportionately higher levels of water stress and lower levels of quality compared to developed countries. Moreover, the underlying drivers, exacerbating factors and available resources vary substantially across regions. As a result, solutions are also not uniform. The diversity and complexity of challenges faced means they will each require a unique balance of financial investment, governmental regulation, technological advances, nature-based approaches and/or market incentives to be successful. Read more
  • Franklin Templeton. Deep waves: the nexus of climate change and geopolitics. This paper looks at climate change through the lens of geopolitics, using case studies to illustrate the impacts that we are already seeing. Climate change has socioeconomic consequences on the way different countries operate. Necessary resources are impacted, productivity is affected and vulnerabilities of institutions, physical infrastructure and the capacity for adaptation and mitigation are exposed. As populations feel the direct impacts on their own livelihoods, there are a series of impacts both within and between countries and for the governments across the world. Read more
  • International Energy Agency (IEA) World Energy Outlook 2021. This special edition of the World Energy Outlook has been designed to assist decision makers at the 26th Conference of the Parties (COP26) and beyond by describing the key decision points that can move the energy sector onto safer ground. Read more

Upcoming Webinars

Post COP26 reflections from the Real Estate industry. 17 November 12:00 PM BST. Post COP26, this webinar will explore the challenges to upgrade buildings and retrofit, deliver and fund greener buildings while also meeting net zero targets. The webinar speakers are JLL, M&G Investments and Maastricht University. Register here.

GARP Climate Risk Symposium. 23 November 01:00 PM - 02:30 PM; 30 November 01:00 PM  -  02:30 PM. Split into 2 parts this webinar focuses on i) the practical advances in climate risk management over the past year; and ii) perspectives from both supervisors and firms about the experience to date of supervisory climate stress tests. Register here.

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.


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