ESG regulatory developments in Europe

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

  • Agreement reached on EU Green Bond Standards. Members of the European Council and the Parliament have agreed on the Commission’s proposal for the European Green Bond Standard (EU GBS) which will establish a high-quality, voluntary standard for European green bonds available to companies and public entities. Market participants widely believe that this will result in a gold standard within the corporate green finance space. Under the new proposals, issuers of EU green bonds would be required to ensure that at least 85% of funds raised by the bond are invested in EU taxonomy aligned principles; they would also have to demonstrate how the use of proceeds supports companies’ transition plans. The creation of a new registration and supervision system has also been proposed, to tighten rules for Second Party Opinion (SPO) providers. The new regulation will also set out a standardised template for issuers of other bonds with environmental objectives to report on their green bonds’ taxonomy alignment in detail, thereby reducing issuers’ and investors’ administrative burden.
  • ASA updates carbon neutral and net zero claim guidance. The Advertising Standards Authority (ASA), the UK's advertising regulator, has updated its guidance to include recommendations for advertisers making “carbon neutral” and “net zero” sustainability claims to consumers. Issuance of the new guidance follows research conducted by the ASA which identified consumer understanding of carbon neutral and net zero claims as a priority area due to their increasing popularity and the potential for customers to be misled by them. ASA will monitor and assess the impact of the guidance for up to 6 months and may launch a review to provide recommendations of acceptable forms of evidence to substantiate such claims. ASA has suggested that companies who are currently making unqualified claims are likely to be breaching existing rules and that it shall take prompt action.
  • EU lawmakers back deal requiring all new cars to be zero emission by 2035. European Union (EU) lawmakers have proposed legislation requiring all new passenger car and light commercial vehicles registered in the EU to be zero emissions by 2035 in line with the EU’s increased climate ambition. The legislation, which is a key aspect of the Commission’s “Fit for 55” initiative to cut greenhouse gas emissions 55% by 2030, includes interim targets requiring a 55% CO2 emission reduction for all new cars and 50% reduction for new vans by 2030 - against a 2021 baseline. The Commission also proposed several emission reduction targets for new heavy-duty vehicles, such as trucks, buses and trailers; including targets to reduce emissions by 90% by 2040 (2019 baseline). However, the final vote which was due to occur on 7 March seems to have been indefinitely delayed, as a number of Member States, including Germany, have questioned their support for the rules.


Reporting: IFRS Sustainability and Climate Reporting Standards to take effect in 2024

The International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards Foundation (IFRS) announced that the new global sustainability and climate disclosure standards can be adopted from January 2024 onwards, following strong demand from market participants. While the new reporting standards are likely to be announced by the end of H1 2023, businesses will start being required to issue disclosures against the standards in 2025.

IFRS Chair Erkki Liikanen claimed that ISSB will consult stakeholders on various issues, such as reporting on human rights, human capital and biodiversity. ISSB will also incorporate a link to the Global Reporting Initiative (GRI) standards and the European Sustainability Reporting Standards (ESRS) to further assist businesses in case there is no specific ISSB standard. 

Reporting: BlackRock laments private company ESG reporting issues

According to Larry Fink, CEO of BlackRock, accurate and consistent ESG reporting is nearly unachievable due to the presence of private companies in the supply chain. During an interview with Bloomberg, he contends that the latter have different (and arguably less stringent) standards on ESG disclosures compared to their publicly listed counterparts, which gives rise to an uneven playing field and inconsistency. Illustratively, such a structural problem manifests itself when larger corporations seek to report on scope 3 emissions within their supply chain, particularly if their suppliers are private companies with diverging requirements. Fink suggests that these structural issues be addressed as a matter of urgency, not least because the global value of ESG-focussed funds is set to hit US$50trn by 2025 (roughly one third of traded assets), according to Bloomberg analysts.

Reporting: MSCI launches corporate sustainability strategy benchmarking tool

ESG data and research provider MSCI has launched a tool, MSCI Corporate Sustainability Insights, which enables companies to compare their ESG and climate data against peers to better inform executives about their businesses’ potential issues and opportunities.

MSCI’s new tool aims to provide streamlined insights from a range of sources such as: companies’ ESG Ratings; their Sustainable Development Goals (SDG) Net Alignment profiles; and views from MSCI ESG Research’s Climate Value-at-Risk and Implied Temperature Rise solutions.

The release of this tool comes against the backdrop of the increasing volume of ESG information provided, with MSCI reporting that the number of climate change-related data points submitted to MSCI Research has risen from 9,914 in 2021 to 14,648 in 2022.

Ratings and data: Fitch Ratings plans enhanced climate risk analysis for corporate credit ratings

Fitch Ratings have released a paper detailing plans to use their Climate Vulnerability Scores (Climate.VS) to improve the process for including “credit-relevant climate-related risks” in their credit ratings. This marks a significant shift from the current approach, whereby the material impacts of climate-related risks are only considered within certain sectors, mainly utilities. 

Climate.VS measure the relative vulnerability of sectors’ and entities’ credit strength and financial performance to climate change-related risks. The scores are focussed on transition risk under a scenario where global warming occurs below a 2°C rise above pre-industrial levels by 2050. Fitch choose to assess transition risk rather than physical risks because they believe that market and regulatory risks will have a larger impact on corporates between 2025 and 2050; they plan to use their sector-level Climate.VS reports released in 2022 to identify entities that might be more vulnerable to climate-related risks.

Capital Markets

Primary Market

Landsec, green bond. Landsec, via its wholly owned subsidiary ‘Land Securities Capital Markets’, has launched an inaugural £400m Green Bond through its updated Green Financing Framework. Sustainability is embedded throughout Landsec’s business, with Landsec having committed to a £135m net zero transition plan and aiming to reduce carbon emissions 70% by 2030.

Ørsted, green bond. Ørsted issued a new triple-tranche EUR Green bond. The bond was issued off their May 2022 Green Finance Framework which broadened the scope of eligible projects by including “Onshore Wind” and “Solar Power” in addition to Offshore Wind. It also included the alignment with EU Taxonomy activities.

Pandora, Sustainability-Linked Bond (SLB). Pandora has successfully placed an inaugural SLB off their newly established SLB Framework. The offering is linked to Pandora achieving 3 Sustainability Performance Targets (SPT): Reduce absolute Scope 1 and 2 emissions by 90% by 2025; Reduce absolute Scope 3 emission by 14% by 2027; Use 100% recycled silver and gold by 2025 (SPT 1 and 2 from a 2019 baseline).

Enel, Sustainability-Linked Bond. Enel launched a repeat bond off its newly updated Sustainability-Linked Financing Framework. The new framework, which builds on the January 2022 versions, introduced new key performance indicators (KPIs) now covering 3 main themes: (1) greenhouse gas emissions, (2) renewable energy, (3) capex aligned with the EU Taxonomy, and revised 2030 targets on previous KPIs.

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

Voluntary Carbon Markets in 2023: a bumpy road behind, crossroads ahead

As companies set decarbonisation targets, many will need to use Voluntary Carbon Markets (VCMs) offset solutions to balance their unavoidable residual emissions. Voluntary Carbon credits are the essential “net” in net zero to balance carbon accounts between emissions and reductions.

Enhanced focus on high-quality, nature-based solutions in the near-term future is expected to encourage the growth of a market for biodiversity credits. The expansion of business coalitions with a strong focus on biodiversity (e.g. the Biodiversity Credit Alliance or the Science Based Targets Network) together with existing nature-focused public and private funds will likely be the key drivers.

In the short to medium term, there is an expectation for more regulatory involvement and oversight in VCMs with a focus on quality of credits and their use as last resort.


Do carbon emissions matter for green bond valuations?

In this piece, M&G looks at how much bond investors have to pay-up (the “Greenium”) for choosing green bonds, and the difference in the Greeniums of heavy vs low emitters.

According to the investment manager when looking at the aggregated result one might be surprised. Not only is the equally weighted Greenium of the high emitting tier close to zero with the average credit spread trading only 1.7 basis points richer than the non-green instrument, the Greenium is also lower than the one in the low carbon emission tier at 7.5 basis points. It is also observed that the Greenium is slightly more pronounced in the US compared to Europe

Two conclusions are drawn from this. Firstly, that fixed income markets still struggle to price ESG bond instruments efficiently. Secondly, the results suggest that currently the Greenium in the space is partially driven by a scarcity premium. 

AllianzGI to begin voting against companies that don’t link exec pay to ESG performance

Investment manager Allianz Global Investors (AllianzGI) announced that it will begin to vote this year against directors of large cap European companies that fail to integrate ESG performance metrics into executive pay policies. The company said that it will evaluate generous pay packages relative to pay increases in companies’ wider workforces, and whether companies underwent significant layoffs, restructuring or cut dividends. In this context, board directors will be held accountable for having net zero targets and credible strategies in place.

Regular updates and tools to keep you informed

Regular articles from us on market-moving themes, and updates on what we are doing to further our ESG commitment.

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

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