Sustainability

Corporate ESG Monthly – 14 June 2022

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

Institutional Developments: Regulators / Standard setters
  • BoE Inaugural Climate Stress Test Results. Following the second round of stress tests in March (noted in issue 16), the Bank of England (BoE) has announced the results of the ‘Biennial Exploratory Scenario’ (BES) exercise which tests banks’ and insurance companies’ financial risks across 3 climate scenarios: early action, late action, and no additional action. The results indicated that whilst such institutions might be able to absorb transition and physical costs, they will face significant financial headwinds in doing so. These are estimated to add up to a 10-15% annual drag on profits. Read more
  • Industry group forms partnership to develop the UK Net Zero Carbon Buildings Standard. Industry organisations including the UK Green Building Council (UKGBC), Building Research Establishment (BRE) and Royal Institute of British Architects (RIBA) have joined forces to develop the ‘UK Net Zero Carbon Buildings Standard’ and align with the Government’s 2050 Net Zero target. The standard will cover new and existing buildings, with performance targets to be created for both operational energy and embodied carbon emissions; it will also address how the procurement of renewable energy – along with the use of carbon offsetting to treat residual emissions – can be incorporated into a net-zero building. Read more
  • EU plans one-year renewable energy permits for faster green shift. The European Commission is looking to accelerate the bloc’s green transition whilst cutting its reliance on Russia. The EU’s executive arm will require countries to designate “go-to” areas of land or sea suitable for renewable energy, which will receive permits within a year. Whilst the permit-granting process may be extended by three months in “extraordinary circumstances”, this is a significant improvement vis-à-vis the status quo, as the existing deadline for projects outside of “go-to” areas is two years. This effort is part of the Union’s wider “REPowerEU Plan”, which sets aside €210bn of additional investment over the next five years to increase the reliance on renewable sources for the production of energy by 5% to 45% by 2030. Read more.
Disclosure

Reporting: International Reporting Organisations to Encourage Adoption of Integrated Reporting Framework

The International Financial Reporting Standards Foundation (IFRS), along with the chairs of the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB), announced plans to align and incorporate their conceptual frameworks into a cohesive Integrated Reporting Framework (IRF).

An Integrated Reporting Framework will drive high-quality corporate reporting and connectivity between financial statements and sustainability-related financial disclosures which improves the quality of information provided to investors. Read more.

 

Reporting: EFRAG launches a public consultation on the Exposure Drafts (EDs)

The European Financial Reporting Advisory Group (EFRAG) launched a consultation on Exposure Drafts (EDs), with the document’s key highlights being the introduction of the concept of “double materiality” and the greater consideration for value chain sustainability factors.

The output of the above consultation will subsequently be incorporated into the EU’s Corporate Sustainability Reporting Directive (CSRD), set to replace the Non-Financial Reporting Directive (NFRD). Read more.

 

Reporting: SEC Targets Greenwashing with New ESG Fund Disclosure Rules

Following the proposal on corporate climate disclosure last month, the US Securities and Exchange Commission (SEC) published new proposed disclosure rules for funds and advisors that claim to integrate ESG factors into their investment products and services.

This proposal aims to provide more consistent information for investors and to address the risk of greenwashing through the exaggeration of ESG claims. Read more.

 

Ratings: >50% of US Public Companies House ESG Data in Spreadsheets

According to a survey conducted by EY US and the FERF research group, 55% of the largest public companies in the US store ESG information in spreadsheets. Only a quarter of respondents suggested that ESG information is housed in ESG-specific software or in software used for financial reporting; unsurprisingly, the average score that respondents gave their businesses’ ESG automation processes is 3.5 out of 10. Meanwhile, the SEC has tightened climate reporting requirements for companies and funds, as noted in the “Reporting” section. Read more.

 

Ratings: ISS ESG Launches Sustainable Investment Product Disclosure Solution

ISS ESG launched its new Regulatory Sustainable Investment Solution, aimed at enabling investment managers and other financial market participants to meet emerging disclosure requirements for sustainable investment products. Launching with a universe of over 12,000 corporates, the new solution helps users meet SFDR reporting obligations for Article 8 and 9 labelled products. It also enables users to screen relevant sectors, determine involvement in controversies, and carry out tailored analysis. Read more.

 

Ratings: Microsoft’s Full Launch of Cloud-Based Sustainability Solutions Suite

Microsoft has announced the general availability, as of 1st June, of its Cloud for Sustainability, less than a year after the platform’s initial launch in July 2021. Featuring new capabilities, the platform has also been integrated with Sustainability Manager, a new solution offering businesses an automated view into the emissions impact of their entire operations and value chain. Read more.

Capital Markets

Primary Market

Green and utilities accounted for the lion’s share of supply in the primary market. It was an active month with more than EUR 13bn of mostly Green Use of Proceeds transactions concentrated in the utility sector. Given a still cautious investor appetite against a continually volatile market backdrop, new lower beta and green issues showcased a limited greenium in May. There was however, a slightly better bid in long-dated Green bonds (10yr+) due to the drive from asset managers and insurance investors to have a higher % of their core holdings in ESG format.

  • TenneT, green bond. It was the first transaction launched off TenneT’s new Green Financing Framework from March 2022 which aligns with the latest draft of the EU Green Bond Standard. Read more.
  • Suez, green bond. It was Suez’s debut green transaction (2.6 billion euros) launched off its newly established Green Bond Framework, established in April 2022. The eligible categories for the use of proceeds include water, waste, and smart environmental solutions via capital/operational expenditures, acquisitions of entities and/or assets, and research & development. Read more.
  • Telefonica, sustainability bond. This was a repeat sustainability issue from Telefonica’s SDG Framework updated in January 2021 – total outstanding in ESG-labelled format (green or sustainability) EUR 3.25bn. The proceeds are to be used for energy efficiency in the network transformation from copper to fibre optic, but also inclusive connectivity accelerating deployment of broadband in unconnected or underserved areas and supporting employment generation and entrepreneurships. Read more.
  • Huhtamaki, sustainability-linked bond. Huhtamaki, a key global provider of sustainable packaging solutions, issued its inaugural sustainability-linked bond off of their new framework. The framework includes two key performance indicators (KPIs): increase share of renewable energy electricity to 100% by 2030 and reduce Scope 1 & 2 emissions by 27.5% by 2030 (each KPI has mapped-out targets for each year until 2030 for flexibility when issuing SLBs). 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.

Carbon Markets

Carbonplace and Visa Team Up for Carbon Credit Transfer

Carbonplace, the new carbon credit settlement platform jointly developed by some of the world’s largest financial institutions (including NatWest), has announced the successful pilot transfer of carbon credits through its system in collaboration with global payments technology company Visa.

The transaction involved Visa purchasing Verra-certified credits from Sustainable Carbon, a leading carbon credit project developer, and represents a major boost for carbon markets. It demonstrates the capability of Carbonplace’s unique settlement technology to increase the speed, efficiency, and security required to support the growing demand for voluntary carbon credits, and in doing so, more effectively drive private sector capital towards global climate solutions.

This pilot will also inform the further development of Carbonplace, which has been likened to the ‘SWIFT’ system of the carbon markets, including the exploration of more innovative ways to settle transactions. It is currently expected that Carbonplace will be operational at the end of 2022. Read more.

Investors

Jupiter: Understanding sustainable investing and views on defence investments

Ethical investing means excluding securities in certain industries and sectors that do not align with an investor’s moral or religious values; thus, an investor may choose not to invest in the defence sector on the grounds that any use of weaponry is immoral, and a nation state only has the right to use diplomacy to defend itself.

Others may argue to the contrary, that every country has the right to defend itself with appropriate military force. Both are values-based positions and ethical investing is a style of sustainable investing, but the two are not the same. Read more.

 

M&G adds global credit fund to sustainable range

M&G has expanded its sustainable fund range with the launch of a global credit fund to offer investors in the suite access to a corporate fixed income product. The M&G Sustainable Global Corporate Bond fund is designed to “maximise sustainability outcomes within the context of a global investment grade bond universe”. It will aim to drive positive environmental and social outcomes through a dedicated allocation to “ESG-themed bonds”, including green, social and sustainability and sustainability-linked bonds. Read more.

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

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