• Sustainable Investor Group urges lawmakers to keep gas out of EU Taxonomy. In an open letter to EU member state representatives and parliament members, the Institutional Investors Group on Climate Change (“IIGCC”) called for gas to be excluded from the EU Taxonomy green investment classification system as it poses the risks of channelling capital towards activities that are inefficient or damaging to the environment. The IIGCC, whose membership includes over 370 investors (>€50 trillion Assets Under Management (AUM)), highlighted the International Energy Association’s net zero by 2050 pathway which notes demand for natural gas will need to shrink by 8% below 2019 levels by 2030 and by 55% by 2050, and existing gas-fired power plants will need to be phased out by 2035; meaning there is no remaining carbon budget for new investments in natural gas. The letter pointed out that while natural gas may have a role to play as a bridge to support the transition to net zero, it does not meet the prescribed requirements to be classified as a transitional activity, and therefore “any inclusion of gas within the Taxonomy would also undermine the EU’s ambitions to set the international benchmark for credible, science-based standards for classifying sustainable economic activities.” Read more. 
• PRA supervisory priorities for 2022 for international banks active in the UK. The UK’s Prudential Regulatory Authority (PRA) issued ‘Dear CEO’ letters to international banks active in the UK, setting out supervisory priorities for 2022. The strategy focuses on six themes including financial resilience, operational risk and resilience, financial risks arising from climate change, diversity and inclusion, risk-free rate transition and other supervisory areas. With the aim of promoting a forward-looking, strategic and ambitious approach to manage climate-related financial risks, the letter noted the PRA will focus on how firms quantify and incorporate the consideration of climate-related risks into business strategies, decision-making and risk-taking assessment procedures. As part of the work, the PRA will pay particular attention to the risk culture and the incentive structures in place at companies, as well as the alignment of remuneration with risk management practices. Moreover, the PRA noted the positive feedback received from industry on its diversity and inclusion discussion paper, stating it expects firms to consider the themes set out in said paper and challenge themselves to understand their gaps and where they can improve. Read more.
• ECB kicks off climate risk stress test for banks. The European Central Bank (“ECB”) has announced the launch of a supervisory climate risk stress test which aims to assess banks’ preparedness for dealing with financial and economic shocks stemming from climate risk. The launch of the new stress test follows the ECB’s Nov-21 climate and environmental risks review, which revealed major shortfalls in preparedness, with no banks meeting expectations, and many lacking sufficient improvement plans. The test will be conducted during H1 2022 with aggregate results expected to be published in July. The test is designed to identify vulnerabilities, best practices and challenges banks face when managing climate-related risk. The stress test results will not have a direct capital impact on banks, but the ECB will qualitatively inform the Supervisory Review and Evaluation Process (“SREP”), potentially indirectly impacting Pillar 2 requirements through the SREP process. Read more.

Reporting: ICMA warns proposed EU Green Bond rules would cause issuers to flee sustainable debt market

The International Capital Markets Association (“ICMA”) has warned that draft proposed amendments made to the European Green Bond (EuGB) Regulation could result in a loss of EU sustainable finance leadership, and disruption to the broader international market for sustainable bonds. The proposed green bond rules were designed to create a ‘gold standard’ for how companies and public authorities could raise green bonds, requiring extended factsheets into prospectuses, the inclusion of EU Taxonomy alignment plans, and mandatory external reviews for impact reports (among other requirements). ICMA warned the increased cost and potential liability for issuers could push them to turn to other markets and sources of finance; resulting in market contraction and loss of EU sustainable bond leadership. Additionally, the amendments could lead to fragmentation of the international green bond market with the EU following different rules from an international market. Read more.

Ratings: MSCI 2022 ESG trends to watch

The MSCI have highlighted the ESG trends impacting investors and companies in the coming year, categorising the trends into: climate-related issues derived from the path to achieving Net-Zero economy, the mainstreaming of ESG and emerging risks / opportunities from the development of sustainability strategies. Within the mainstreaming of ESG, MSCI note the potential of ESG ratings moving back to their intended purpose of improving the investment process – through a financial relevance lens – and as one part of the larger ESG ecosystem, given no single score can answer the growing range of ESG questions. This means there will be a growing requirement for specific lenses such as climate-change, diversity & inclusion, biodiversity, and materiality metrics for a more multi-faceted analysis. Moreover, as regulators and standard-setting bodies turn their gaze towards ESG ratings, one possible outcome could be the adoption of best practices that spell out the purpose of an ESG rating and its data sources and methodological choices, allowing ratings to evolve with an ever-sharper focus. Read more.

Primary market

• Snam, sustainability-linked bond. Snam issued their Inaugural Sustainability-Linked Bond (SLB) off their newly-established (November 2021) Sustainable Finance Framework. Snam was one of the first and only firms to issue transition Use of Proceeds (UoP) bonds (distinct from green bonds) along with Cadent and Castle Peak Power in 2019 and 2020. The transaction represents the first European gas Transmission System Operator (TSO) to include a scope 3 emissions reduction target in its framework. Read more.
• Places for People, sustainability bond. Places for People issued an inaugural sustainability bond in senior unsecured format – which is rare, noting the vast bulk of issuances have been in secured format. The framework is focused on Affordable Housing, Green Buildings and Energy Efficiency, contributing to UN SDGs 1, 7, 11 and 13. Impact metrics are Sustainability Reporting Standard (SRS) aligned, as per sector precedent, and the company intend to report on the impacts of the sustainability bond in a comprehensive annual impact report. Read more.

• VodafoneZiggo, sustainability-linked bond. The SLB was issued off the newly-established Sustainable Finance Framework which replaces VodafoneZiggo’s Green Bond Framework published in December 2020. It is the first benchmark European trade (high-yield) to include a sustainability-linked redemption discount adjustment (instead of a coupon adjustment) – signalling further innovation in the SLB space. KPIs are linked to the company's objective of reducing CO2 emissions throughout the entire chain (Scope 1, 2 and 3 emissions) by 50% by 2025 (compared to 2018). 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.

Carbon offset prices could increase fifty-fold by 2050

Prices for carbon offsets – verified emission reductions equivalent to one ton of carbon each – could be as high as $120/ton or as low as $47/ton in 2050 depending on the type of offsets available, according to BloombergNEF (BNEF). Should all types of offsets continue to be permitted to hit net-zero goals, including those which avoid emissions that would otherwise occur, the market will be oversupplied with largely worthless credits. Conversely, if the market is restricted to just offsets that remove, store or sequester carbon to achieve net-zero targets, there will be insufficient supply to keep up with demand, causing significant near-term price hikes and damaging liquidity. The hybrid scenario looks at a gradual evolution of the offset market, from the voluntary market today, to a removal-only market for corporations and finally to a removal-only market primarily for countries, rather than companies, by mid-century. Read more.

AXA investment managers published a framework for assessing sustainability-linked bonds

SLBs, seen as a powerful tool (in particular) for high-emitting issuers to finance their transition towards a more sustainable business model, will not be part of AXA IM’s green and impact investments – as opposed to Green, Social and Sustainability bonds ("GSSBs") – but rather as transition investments. SLBs and use-of-proceeds transition bonds both relate to transition finance instruments that will allow AXA IM to take an active role in powering that transition – in addition to green and impact investing strategies through GSSBs. Read more.

Candriam launches sustainable bond impact fund

The new Sustainable Bond Impact Fund aims to reconcile financial returns alongside a positive social and environmental impact. It will look to select corporate, sovereign and quasi sovereign bonds based on their ability to address societal challenges and generate a positive contribution within the United Nations Sustainable Development Goals (UN SDGs) framework. The fund, classified as an article 9-financial product under the European Sustainable Financial Disclosure Regulation (SFDR), seeks to include a minimum 75% ratio of sustainable bonds and to contribute positively to the UN SDGs. In addition, 10% of the net management fee will be donated to specific organisations supporting green or social projects. Read more.

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

• Dr Arthur Krebbers, Head of Sustainable Finance, Corporates
• Gustavo Brianza, Head of Ratings & ESG Advisory
• Daniel Bressler, Vice President Sustainable Finance, Corporates
• Darren Hook, Head of IG Corporates Research
• Philippe Bradshaw, Head of IG Syndicate
• Helen Ferguson, ESG Advisory
• Thomas Gidman, Vice President ESG Advisory
• Dean Shahfar, Sustainable Finance Corporates
• Pietro Stimamiglio, Sustainable Finance Corporates
• Niceasia Mc Perry, Sustainable Finance Corporates
• Nicholas Bulloch, ESG Advisory
• Gregory Efthimiou, ESG Advisory