Pioneering blue bonds expand investment opportunities

In our monthly Corporate ESG newsletter we breakdown the trending ESG* trades and themes, helping Corporates get ahead of the latest issues shaping the market.

Institutional developments: regulators / standard setters

EU Council agrees on new rules to cut methane emissions

The EU Council and Parliament have reached a provisional agreement on regulation to track and reduce methane emissions in the energy sector. The regulation will impose new reporting, verification, and mitigating factor requirements for the oil, gas, and coal sectors. Specific deadlines and frequencies have been agreed for the monitoring, reporting, and inspections of potential sources of methane emissions. For example, mine operators will be required to submit ‘methane emissions data’ reports to authorities within 12 months. Key outcomes include helping the EU achieve its climate goals and contributing to the COP26 Global Methane Pledge to reduce methane emissions by 30% by 2030, alongside improving air quality and human health.


UK government outlines plans to stimulate green industries

The UK government has announced plans to speed up connections and increase capacity of the electricity grid, while also investing £960 million in green industries over the next five years. The plans aim to stimulate UK investment, alongside achieving energy security and cost savings for both families and businesses. Similarly, the government has accepted the Electricity Networks Commissioner’s programme of reform to build new networks faster. This will support the delivery of up to 50GW of offshore wind power by 2030 and 24GW of new nuclear by 2050. The commitment to the Green Industries Growth Accelerator aims to accelerate advanced manufacturing capacity in key net-zero sectors, including offshore wind, networks, hydrogen nuclear and carbon capture. Similarly, electricity generators planning to launch new projects after November 2023 will have an exemption from the Electricity Generator Levy on revenues from those projects.


EU Council agrees on new rules to restore and preserve biodiversity

The EU Council presidency and Parliament have reached a provisional political agreement on nature restoration regulation; the proposal aims to restore biodiversity in at least 20% of the EU’s land and sea areas by 2030, and all ecosystems in need of restoration by 2050. The agreement will be submitted to the wider EU Council and to the Parliament’s environment committee for endorsement. The draft sets specific, legally-binding targets for nature restoration in a range of terrestrial, coastal, freshwater and marine ecosystems; in particular, under the new rules, member states must regularly submit national restoration plans to the Commission, outlining how they will deliver on the targets, alongside monitoring and reporting on their progress. With regard to ecosystem-specific obligations, member states will have to plant at least three billion trees by 2030 to restore forests; furthermore, man-made barriers to the connectivity of surface waters will have to be removed, so as to turn 25,000km of rivers into free-flowing ones.


Reporting: FCA confirms sustainability disclosure and labelling regime

The Financial Conduct Authority (FCA) has finalised the new sustainability disclosure requirements and a labelling regime for sustainable investment products; aiming to reduce greenwashing and improve trust in the market. Its announcements include an anti-greenwashing rule for all authorised firms to ensure the validity of sustainability-related claims, and, among others, product labels to help investors navigate ESG credentials. The rules apply to UK-based asset managers, although labelling and anti-greenwashing provisions also extend to UK distributors; non-UK market participants are therefore excluded. In addition, the FCA has introduced four labels for investment products, with the latest being “sustainability mixed goals”. In order for the label to be granted, at least 70% of the investments must match a product’s sustainability goal. The rules regarding greenwashing, labelling and marketing will become effective in May, July and December 2024, respectively. 

Reporting: 2023 EY climate risk disclosure barometer

The EY Global climate risk barometer is a benchmark that scores the progress achieved in the number of recommended disclosures that companies make (coverage) and the extent and detail of each disclosure (quality) of climate-related disclosures globally. The analysis shows an increase in companies’ reporting on climate; however, businesses seem to be falling short of their carbon ambitions. The barometer illustrates that certain markets and sectors are pushing ahead with climate reporting, while others are lagging. In terms of disclosure quality, the Middle East and Southeast Asia have improved their performance vs last year but are still trailing behind Europe. Sector-wise, energy companies scored the highest for quality and coverage, closely followed by financial institutions. Overall, quality has improved across the board, with the most positive changes observed in real estate, mining and agriculture, mostly due to stakeholder pressure, according to the barometer. However, the report concludes that the pace and intensity of reporting are not progressing as quickly, with data and technology being recommended as potential solutions to the above.


Reporting: 14% of companies reduced carbon emissions in line with their ambitions, in the last five years

The study by CO2 AI and Boston Consulting Group (BCG) investigates the progress that businesses have made on emissions measurement and reduction globally. 1,850 executives with relevant responsibilities in the field, working at companies with at least 1,000 employees and $100m in revenues, were surveyed across 18 major industries and 23 countries. The survey found that only 10% of companies currently measure and report all their emissions, revealing no improvement relative to the 2022 survey. Furthermore, only 14% confirmed that they have reduced their emissions in line with their ambitions over the past five years. Companies that report reducing their emissions as set out in their commitments were found to display four notable traits: i) collaboration with suppliers and customers; ii) calculation of emissions at the product level; iii) harnessing of the power of digital technology in the emissions-management process; and iv) having a positive view on regulation.


Ratings and data: UK to unveil regulatory regime for ESG ratings industry

The UK government plans to regulate ESG rating agencies due to concerns about their unregulated status and influence on sustainable investment. Formal proposals are expected in January after a three-month consultation closed in June. In order to regulate ESG agencies, the Treasury is considering whether new legislation needs enacting and new regulatory bodies need creating. Expanding the remit of the FCA, which is currently encouraging the industry to adopt a voluntary code of conduct, is also being considered as an option. For context, the voluntary code is due to be published in December 2023; in July 2023, the draft set out that providers should avoid conflicts of interest, which can be achieved through transparent publication of their methodologies, alongside other reforms.


Ratings and data: European Central Bank (ECB) paper studies ESG ratings’ effects on cost of debt

The study aims to understand how debt investors incorporate ESG ratings into investment decisions and the resulting implications for certain US firms’ cost of debt. It utilises an April 2020 methodology-driven change in ESG ratings by Refinitiv ESG and its effect on loan market-based credit spreads using a sample of US corporates. In summary, the paper finds that loan spreads of downgraded ESG-rated firms augmented by around 10% compared to non-downgraded ESG-rated firms following amendment in Refinitiv’s methodology; the firms were within the same industry, rating category, and month. The research concludes that the rise in spreads was not driven by firms’ increased default risk, rather by investors’ demand for a greater premium; furthermore, the impact on credit spreads was found to be temporary, as firms’ increase in cost of debt was followed by a decline around two months post the methodological change.


Ratings and data: 2024 MSCI ESG Ratings model consultation

MSCI ESG Research hosted a virtual event on 7 November to walk through the proposed changes in their ratings model. Investors and rated corporate issuers were invited to actively participate in the consultation process (consultation ended on 8 December). The key areas of focus for the proposed changes were: i) MSCI ESG industry materiality map, aimed at determining the relevance of ESG key issues to each industry; ii) ESG ratings industry peer set groupings, with proposed adjustments to groupings; and iii) the introduction of “buffer zones”. The proposed introduction of buffer zones around the letter rating band thresholds, which MSCI already utilise in methodologies unrelated to ESG ratings, is intended to enhance the stability of ESG ratings.

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PRI launches taskforce on net-zero policy at COP28, strengthening global collaboration for climate action

The Principles for Responsible Investment (PRI) has introduced a Taskforce on Net Zero Policy at COP28, endorsed by the United Nations. This initiative, unveiled at the UN Secretary-General’s High-level meeting for Non-State Actors, aims to implement core recommendations from the High Level Expert Group (HLEG) established during COP27. The HLEG called for non-state actors to take ambitious action aligning net-zero commitments with scientific findings. The taskforce will focus on creating a collaborative space for knowledge-sharing among policymakers, offering research and technical support, and identifying regulatory opportunities to implement HLEG recommendations. Partnering with organisations like the UN Environment Programme Finance Initiative and the Vulnerable 20 Group, the taskforce seeks to practically implement and support recommendations, fostering global efforts toward a sustainable and net-zero future. CEO David Atkin emphasises the urgency of meaningful action for positive outcomes and sustainable economic growth.


Global commitment to protect nature: 18 countries sign joint declaration at COP28

During COP28, 18 countries, including the US, China, and the UK, signed the Joint Statement on Climate, Nature, and People, addressing the escalating risks of climate change to biodiversity. The commitment involves scaling up diverse sources of finance, enhancing biodiversity and land restoration efforts, and prioritising inclusive access to funds. The signatories also emphasised the need for coherence in data reporting, encouraging interoperability between metrics and frameworks related to climate change, biodiversity, and sustainable land management. Regular reviews are planned to assess collective progress toward these goals.


Enhancing voluntary carbon markets: European countries propose recommendations for transparency and credibility

European countries, including the Netherlands, Germany, France, Spain, Finland, Belgium, and Austria, are advocating for improved standards in voluntary carbon markets (VCMs). The proposal emphasises the need for transparency, high-quality credits, and credible claims to prevent potential negative impacts. The recommendations include mapping emissions, prioritising internal reductions, clear claims on certificate usage, purchasing high-quality certificates, considering host country situations, and ensuring transparency in reporting. These measures aim to enhance the integrity of the market and align with the Paris Agreement, offering immediate guidance with long-term applicability at the EU level. For more on the discussion around VCMs at COP28 check-out our latest article.


World climate summit witnesses ambitious declaration: over 20 countries pledge to triple nuclear energy for global Net-Zero emissions by 2050

During the World Climate Action Summit, representatives from more than 20 countries across four continents launched a declaration recognising the pivotal role of nuclear energy in achieving global net-zero greenhouse gas emissions by 2050 and maintaining the 1.5-degree target. The declaration outlines a commitment to triple global nuclear energy capacity by 2050 and encourages international financial institutions to include nuclear energy in their energy lending policies. Participating countries include the United States, Canada, Japan, and several European nations.


IFC and T Rowe Price pioneer ‘Blue Bond’ fund

The International Finance Corporation (IFC) and T Rowe Price are set to introduce the world’s first dedicated ‘blue’ bond investment strategy, aimed at supporting sustainable marine and water initiatives in emerging markets. T Rowe Price (AuM: $1.3 trillion) and IFC have co-developed Blue Impact Investment Guidelines that will be implemented for the Emerging Markets Blue Economy Bond Strategy, which aligns with the issuer-focused IFC Guidelines for Blue Finance. This strategy aims to attract investor capital to promote a blue economy, fostering sustainable capital markets in developing economies. The initiative will be accompanied by an IFC Technical Assistance Facility (TAF) to encourage the growth of blue bond issuance in emerging markets, building on the IFC’s leadership in the blue bond market with the success of investment and mobilisation of US$1.4 billion in 12 blue bonds and loans since 2020.


KKR successfully close US$2.8 billion Global Impact Fund II

American private equity firm KKR has announced the successful closure of its Global Impact Fund II (GIF II), raising US$2.8 billion, more than double the funds raised by its predecessor in 2020. The fund, aimed at investing in proven companies addressing global challenges, attracted commitments from a diverse investor base, including public pensions, family offices, insurance companies, and other institutional investors. KKR will contribute US$250 million from its own resources. The fund focuses on key themes such as climate action, sustainable living, lifelong learning, and inclusive growth, aligning with the UN Sustainable Development Goals. KKR Global Impact has utilised Sustainability Accounting Standards Board guidelines to assess portfolio company performance since the launch of its impact strategy in 2018, having invested in 18 companies to date.

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