Sustainability

Corporate ESG Monthly – 12 July 2022

Breaking down trending ESG* trades & themes to help Corporates get ahead of the latest issues shaping the market.

Institutional Developments: Regulators / Standard setters
  • Nuclear and natural gas-related activities will be included in the EU Green Taxonomy. The European Parliament voted against an objection by two parliamentary committees to the Commission’s proposal to include nuclear and natural gas as sustainable energy investments in the EU Taxonomy via a complementary delegated act. The Commission believes there is a role for private investment in gas and nuclear activities in the green transition and has proposed the classification of certain fossil gas and nuclear energy activities as transitional activities contributing to climate change mitigation. The inclusion of certain gas and nuclear activities is time-limited and dependent on specific conditions and transparency requirements. 278 Members of the European Parliament (MEPs) voted in favour of the resolution, 328 against and 33 abstained. An absolute majority of 353 MEPs was needed for Parliament to veto the Commission’s proposal. If neither Parliament, nor Council object to the proposal by 11 July 2022, the Taxonomy Delegated Act will enter into force and apply as of 1 January 2023. Read more about the EU Green Taxonomy
  • The ECB takes further steps to incorporate climate change into its monetary policy operations. The European Central Bank (ECB) announced that it plans to gradually decarbonise its corporate bond holdings on a path aligned with the goals of the Paris Agreement. It will adjust corporate bond holdings in the Eurosystem’s monetary policy portfolios (such as the corporate sector purchase programme) and its collateral framework (partly through adjusting its haircut requirements). It will also be introducing climate-related disclosure requirements and enhancing its risk management practices. To that end, the ECB will tilt these holdings towards issuers with better climate performance through the reinvestment of the sizeable redemptions in the ECB’s portfolio over the coming years. Read more about the steps taken by the ECB
  • ICMA announced key publications and resources in support of market transparency and development. The International Capital Market Association (ICMA) announced – at the 8th Annual Conference of the Principles key updates – publications and resources to support market transparency and development for sustainable finance. The new information includes definitions for green securitisation, a registry of key performance indicators for sustainability-linked bonds and new resources for climate transition finance. A key recurring theme from the Executive Committee of the Principles was how upcoming mandatory disclosures will affect business decisions and financing. Of particular interest is how those mandated disclosures may help promote integrity in the sustainable finance market. Additionally, it was debated how these updates, along with mandatory reporting, would affect the growth and size of the green bond market. Read more about the ICMA announcement
  • EU lawmakers set board diversity requirements. The Council and European Parliament announced an agreement on a new piece of legislation setting targets for EU companies to improve gender balance on corporate boards. The new directive would promote increased representation of women on boards; targeting at least 40% of non-executive director positions, and 33% of all board positions, by 2026. In addition to the targets, the initiative introduced transparent board appointment procedures, which requires companies to report the reasons in cases where the objectives are not met and the measures to address the shortcomings. Penalties for failing to comply could include fines or annulment of directors’ appointments. The new agreement is subject to formal approval by co-legislators – once it enters into force Member States will need to transpose it into national law within two years. Read more about the board diversity requirements
Disclosure

Reporting: UK Pensions required to disclose 1.5°C climate alignment of portfolios

UK pension fund schemes will be required to report on the alignment of their investments with the global climate goal to limit warming to 1.5°C, according to new measures introduced by the Department for Work and Pensions (DWP).

The announcement marks the next step in climate transparency requirements for the country’s pension schemes, following legislation last year mandating the publication of Task Force on Climate-related Financial Disclosures (TCFD)-based disclosure. Read more about the required disclosures

 

Reporting: EU to require auditing of sustainability reporting, disclosure by large non-European companies

The EU Council and European Parliament announced that they have reached an agreement on the rules of the Corporate Sustainability Reporting Directive (CSRD). The new agreement will require companies to have their reported sustainability information independently audited and will also apply to some large non-EU companies.

The CSRD is considered a major update to the 2014 Non-Financial Reporting Directive (NFRD) which is the current EU sustainability reporting framework. It will introduce more detailed reporting requirements and require audited assurance of the information reported. Read more about the new EU requirements

 

Ratings: French regulator AMF calls for regulation of ESG data and ratings providers

Providers of ESG data and ratings services ought to be subject to a regulatory framework, according to the French financial market regulator, the Autorité des Marchés Financiers (AMF). The call for regulation comes in the wake of increasing pressure on the European Commission to regulate ESG ratings. Demand for ESG data, services and ratings has surged as investors increasingly integrate ESG considerations into the investment process, despite markets and securities regulators not generally covering these providers. The AMF set out a few recommendations for initiatives targeting the sector, including proposing that future regulation goes beyond exclusively covering ESG ratings, rather focusing on data and services in the market too. Read more about AMF’s calls for regulation.

 

Ratings: EU markets regulator releases ESG Ratings Market Assessment as part of process to regulate sector

The European Securities and Markets Authority (ESMA) has announced publication of its assessment of ESG ratings providers. This follows a “call for evidence” by the regulator, to provide a comprehensive report of ESG ratings providers operating in the EU. The study finds that the market is split between a small number of large non-EU entities (e.g. MSCI, Sustainalytics, Morningstar, ISS, S&P, and Moody’s), with over three quarters of users utilising more than one provider. ESMA also gathered information from entities covered by ESG ratings providers, finding that most dedicate some level of resources to these interactions. These entities also flagged shortcomings of ESG ratings relating to the transparency of the ratings process as well as on feedback timing and error correction. Read more about ESMA’s assessment publication.

Capital Markets

Primary Market

Greenium harder to pinpoint while ECB re-investments will reflect climate risk going forward

• Greenium remained hard to estimate in June given the ongoing fragility in the macro backdrop.
• Investors remain focused on lowering their duration where feasible thereby resulting in appreciable appetite for shorter-dated ESG-labelled instruments.
• For the time being, the impact of the ECB announcement on the gradual decarbonisation of its corporate bond holdings, is likely to be felt most in sectors, such as Tobacco, which will suffer from the lack of reinvestment.

RCI Banque, green bond. It was the inaugural issuance off their new Green Bond Framework from May 2022, aligned to the ICMA GBP 2021 and the eligibility criteria set-out to be in-line with the Technical Screening Criteria of the EU Taxonomy. The sole project category, clean transportation, will go towards loans and lease contracts for electric vehicles and their charging infrastructure. Read more about the RCI Banque issuance

A2A, green bond. A2A, the Italian multi-utility company, returned to the sustainable finance market with a green bond aligned to the EU Taxonomy. The company remains a key player in sustainable finance with two active frameworks and a number of Green Use of Proceeds (UoP) and Sustainability-Linked Bonds (SLBs) outstanding, issued since 2019. Read more about the A2A issuance.

Gasunie, SLB. The second SLB off Gasunie’s SLB Framework established in September 2021. As a gas infrastructure company, not directly involved in the production of gas, Gasunie is playing a central role in the energy transition and is involved in a number of Carbon Capture Utilisation and Storage (CCUS) projects and investments aiming at the development of technologies & infrastructure for hydrogen, green gas and heat. Read more about Gasunie’s issuance.

 

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.

Carbon Markets

EU parliament votes to include shipping in the EU ETS

The EU Emissions Trading System (ETS), serving as a cornerstone of the EU’s policy to combat climate change, puts a price on carbon and lowers the cap on emissions from certain economic sectors. In July 2021, the European Commission proposed to include shipping emissions in the EU ETS for the first time. In June the EU Parliament voted in favour of including shipping in its carbon market, adding pressure for the industry to accelerate its decarbonisation. The EU Parliament has also proposed to create a sector-dedicated Social Climate Fund and earmark 75% of the revenues generated by the shipping allowances to assist in the sector’s energy transition. Read more about the vote to include shipping in the EU ETS.

How carbon markets can advance equitable climate action globally (says the UNDP)

Carbon markets are trading systems in which carbon credits are sold and bought. One tradable carbon credit equals one tonne of carbon dioxide, or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. As such they can be a powerful tool in helping to advance carbon justice, according to the United Nations Development Programme (UNDP). By entering carbon markets, developing countries can advance their socio-economic development while transitioning to a low-carbon economy in a cost-effective way that puts a price on carbon, allows for carbon trading, and stimulates new market opportunities for companies. Read more about how carbon markets can advance equitable climate action.
 

Investors

Groups call to keep gas out of UK’s Green Taxonomy

In an open letter by the CEOs of the Institutional Investors Group on Climate Change (IIGCC), Principles for Responsible Investment (PRI) and UK Sustainable Investment and Finance Association (UKSIP), the organisations suggested that including gas in the UK’s Green Taxonomy would undermine the system’s credibility for investors and damage the UK’s standing on sustainable finance. While investors recognise the potential of gas-based energy in supporting the transition, they warn that including natural gas in the Taxonomy may well give rise to greenwashing risk. Read more about the calls to keep gas out of the UK’s Green Taxonomy

Amundi launches short-term corporate green bond fund

The Amundi Funds Euro Corporate Short-Term Green Bond strategy will invest in green bonds that have been issued by worldwide corporations supporting environmental and climate-friendly projects. Green bonds selected in the portfolio will be aligned with the Green Bond Principles (GBPs) with the fund reporting annually on CO2 emissions avoided by tonnes. The fund will be co-managed by Yael Muscat, senior credit portfolio manager, Alban de Faÿ, head of responsible investment fixed income process, and Hervé Boiral, head of Euro Credit. Read more about Amundi’s newly launched fund

European ESG assets to reach €9 trillion by 2025

European-domiciled ESG assets are poised to reach a value of between €7.4 trillion and €9 trillion by 2025, according to research by PwC Luxembourg. ESG funds will also account for between 46% and 56% of total European Mutual Fund assets, up from 37% at end-2021. PwC stated that 66% of European institutional investors plan to stop investing in non-ESG funds with a further two thirds set to do so by the end of 2023. Investors are becoming increasingly committed to pursuing ESG funds with additional research finding 71.9% of respondents are prepared to pay a premium in order to support ESG products. Read more about the rise in value of European ESG assets.
 

Upcoming webinars

The “S” of ESG, Tuesday 12th July, 2:00pm – 3:00pm (UKT): Social topics have slowly been moving towards the forefront of sustainable finance, with a draft EU Social Taxonomy, growth in social / sustainability debt and the emergence of social-focused funds. Join us for this webinar where we’ll discuss this and more, with Douglas Farquhar (NNIP) and Théo Kotula (AXA). Register here.

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