SBTi has published new guidance to support companies to decarbonise their supply chains. The Science Based Target Initiative (‘SBTi’) has published new guidance to support companies in engaging their supply chains, to set science-based targets. Companies must set scope 3 targets that cover at least 67% of their total scope 3 emissions, if scope 3 represents over 40% of their total footprint, to be in line with SBTi criteria. Supplier engagement targets are one of the four target-setting methods for companies to formulate scope 3 targets. The new guidance outlines how to develop supplier engagement targets, implement engagement programmes and ensure businesses fully understand what is required to achieve these goals. Addressing supply chain emissions enables supplier engagement with the possibility of enhancing efficiency, transparency and resiliency across the value chain.

EU Council announces agreement on nature restoration law. The European Council has reached an agreement on the establishment of a broad range of nature restoration measures, including requirements to protect and restore at least 20% of EU land and sea areas by 2030, and all areas in need of restoration by 2050. This agreement defines the Council’s negotiating position on the Nature Restoration law proposed by the Commission in June 2022. The proposed law contains several nature restoration targets such as improvement and re-establishment of biodiverse habitats in various ecosystems, reversing the decline of pollinating insect populations, maintaining green urban space, restoring drained peatland under agricultural use, and restoring marine habitats, among others. The Council’s agreement allows the proposal to move forward to negotiations but does soften several of the EU Commission’s proposals. One of the key changes is an article that reduces the burden for renewable energy projects, allowing the planning, construction and operation of such projects to be deemed as having “an overriding public interest”.

ICMA announce updated guidance for transition finance and climate-themed bonds. The International Capital Market Association (ICMA) has released the first update of the Climate Transition Finance Handbook (CTFH) since its publication in 2020. The update acknowledges the development of ‘climate transition’ bonds in certain jurisdictions and includes enhanced guidance around greenhouse gas (GHG) emissions reductions disclosure requirements and new annexes with illustrative disclosures and infographics. The Sustainability-Linked Bond Principles (SLBPs) and related tools were also updated to include adapted language for sovereign issuers, as well as new sovereign-specific illustrative metrics such as air pollution, forest area coverage and share of population using the internet. The key performance indicator (KPI) registry for corporates was also expanded with more than 100 metrics added. Most notably, the addition of 20 new KPIs focused on the ‘Just Transition’ such as metrics monitoring employees redeployed from unsustainable operations; 40 new metrics centred on the value chain, for example KPIs monitoring share of local procurement and procurement from countries exposed to human rights risk; and more than 30 additions to the access and affordability theme, particularly focused on the financial, healthcare and transport sectors.

FCA raises concerns of ‘greenwashing’ in sustainability-linked loans. The UK FCA has published an open letter to banks and companies warning that the sustainability-linked loan market is “not achieving its potential” and faces growing accusations of ‘greenwashing’ amid concerns of weak incentives, low ambition targets and misalignment with public climate goals. The FCA also noted potential conflicts of interest, with banks in some cases providing remuneration incentives to promote SLLs in order to help achieve their sustainable finance targets; leading to potential acceptance of weaker targets and key performance indicators. The FCA noted several banks have advocated for uniform disclosure and independent monitoring and verification of SLL targets. The FCA indicated no plans to directly regulate the SLL market but will continue to monitor the market “with a view to considering the need for further measures”.

Reporting: IFRS release global sustainability and climate reporting standards

The International Sustainability Standards Board launched two new global sustainability and climate disclosure standards (IFRS S1 and IFRS S2) which are expected to form the basis for emerging sustainability reporting requirements by regulators globally. The new standards will begin to apply for annual reporting periods beginning as of January 2024, with companies starting to publish disclosures against the standards in 2025.

• IFRS S1 requires companies to disclose information about sustainability-related risks and opportunities that would be useful to primary users of general-purpose financial reports.
  
• IFRS S2 sets out specific climate-related disclosures including reporting of Scope 1, 2 & 3 GHG emissions as well as the portion of assets and business activities that are vulnerable to climate-related risks and opportunities.

One consideration for corporates is that the ‘costs’ of initially applying the proposals are likely to be substantial, noting the one-time costs of developing reporting systems, internal controls and personnel costs; but this is expected to decrease over time as familiarity with disclosure requirements improves. 

Reporting: EU Commission ease sustainability reporting rules

The European Commission has released a series of proposed changes to the European Sustainability Reporting Standards (ESRS). The proposals were released as a draft ‘Delegated Act’, with a consultation period that requested feedback by 7 July. The proposals include amendments to ease the burden on smaller companies and first-time reporters by extending the phase-in period for certain sustainability factors such as: Scope 3 emissions, disclosures on working conditions and equal treatment, and biodiversity disclosures. The Commission anticipates that its proposals will result in cost reductions during the phase-in period of nearly €1.2 billion, and €230 million on an annual basis, compared to European Financial Reporting Advisory Group (EFRAG) proposals. It’s important to note that some have raised concerns that the new proposals will negatively impact the effectiveness of the reporting standard, calling it a “significant setback in ambition”.

Ratings and data: EU propose regulation of ESG ratings agencies

The proposed regulation will require organisations, who are wishing to provide ESG ratings, to become authorised and supervised by the European Securities and Markets Authority (ESMA); breaching the new rules could land them with a fine of up to 10% of their annual net turnover. This announcement emphasises the rapid growth of sustainability-based policy interventions that continue to shape the financial markets. ESG Book released analysis showing that global ESG regulations have increased by 155% over the last decade.

According to the EU's draft legislation, providers must stop giving consulting services to investors, the sale of credit ratings and the development of benchmarks among other things, to avoid conflicts of interest; potentially forcing agencies to separate their business. A factsheet shared by the European Commission said the rule would deliver more transparency, more integrity, clearer methodologies, and better clarity on data sources, to help investors and rated companies to make more informed decisions.

Ratings and data: ISS ESG announce update to Environmental & Social Disclosure QualityScore

ISS ESG said forthcoming updates to its QualityScore methodology come amid a “backdrop of advances in industry disclosure standards” with changes expected to take effect in Q3 2023. The enhancements expected include expansion of included topics to enable more in-depth assessments; improved tracking of disclosures around workforce diversity, equality and human rights; introduction of new participation factors in social and environmental initiatives / frameworks (e.g. Women’s Empowerment Principles, RE100); updates to the existing assessments of companies’ natural resources profile; and a more granular review of carbon- and climate-related disclosures.

Primary Market

Acciona, Sustainable Impact Financing Framework. Acciona published its new Sustainable Impact Financing Framework which combines the previous three iterations of the company's frameworks to create a single “family” framework, covering all financing instruments and types of debt that can be issued by ACCIONA and its subsidiaries. Based on a “Dual Impact” philosophy, it covers green use of proceeds and sustainability-linked financing structures while introducing a new local impact feature that, when combined with either traditional structure, aims to deliver enhanced positive environmental and / or social outcomes.

Ørsted, Blue Bond. Ørsted launched its inaugural €100 million “blue” use of proceeds private placement bond making it the global first blue bond from an energy company. Proceeds will be used to finance projects related to (i) offshore biodiversity and (ii) sustainable shipping.

United Utilities, Sustainability Bond. The renewed momentum in Sterling primary continued, with United Utilities issuing a £350 million Sustainability bond. Issued off of the company’s Sustainable Finance Framework, which supports a broad range of both environmental and social projects. Specific projects exclusions are also mentioned with regards to activities related to fossil-fuel, nuclear, large hydropower, tobacco, alcohol, gambling or defence.

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.

J.P. Morgan set out core principles for carbon markets

J.P. Morgan has released a new white paper highlighting the role of carbon markets in accelerating the transition to a low-carbon economy, and calling for carbon credits to be used as a supportive tool and not to replace efforts to avoid, reduce, and neutralise emissions.

The paper comes after the International Organisation of Securities Commissions (IOSCO) issued two consultation papers last year – the first offers ‘recommendations’ for jurisdictions seeking to establish compliance carbon markets, and the second explores attributes that can foster sound voluntary carbon markets.

The paper states that, while the voluntary carbon market is not a “silver bullet” it is an “important tool for enabling the low-carbon transition to occur at a pace and scale commensurate with the climate challenge”. 

NatWest publish the results of global fixed income investors survey – climate risks and opportunities

71% of respondents say their organisation has made a net-zero commitment – just over half of these investors aim to achieve net zero by 2050, putting greater emphasis on the importance of issuers’ net-zero commitments in the years to come.

Currently, asset managers’ net-zero commitments only extend to 22% of their assets under management (AuM); however, this proportion is expected to increase to just over a third of AuM in five years’ time, meaning an increasing number of investment decisions will be in part based on net-zero alignment (e.g. by tilting portfolios away from companies with high emissions).

Only 15% of respondents strongly agree that they have enough emissions data to track progress against their net-zero targets – investors at the moment primarily use reported Scope 1 and 2 emissions data (63%), with fewer respondents (42%) using reported Scope 3 emissions. However, within the next 1-2 years, the number of investors expecting to factor in Scope 3 data is anticipated to almost double.

Regarding climate physical risk, only 18% of respondents say they consider climate physical risk for all corporate investments; however, investors’ focus on physical risks may increase in the future as the frequency and severity of climate-related perils intensifies.

Nearly three quarters (72%) of respondents selected a sustainable bond structure – use of proceeds bonds, green securitisation, or sustainability-linked bonds – as their first choice for reaching net-zero commitments; however, a sizeable contingent (28%) prefers conventional bonds, perhaps reflecting some scepticism over green, social and sustainability (GSS)/SLB bonds amidst growing concerns over greenwashing.

Investor feedback suggested that there is a strong preference for improving existing issuance structures through greater transparency, additionality and credibility as opposed to new product innovation.

Columbia Threadneedle launch new social bond fund

Columbia Threadneedle (CT) Investments has launched a global bond fund for UK investors. The CT Global Social Bond Fund will be led by Tammie Tang and aims to invest along the targets of the UN’s sustainable development goals.

The fund will have a geographic focus on the UK and Europe and will determine the suitability of bonds based on their social impact by giving each a social rating based on their “focus on deprivation and clarity of impact reporting” according to the investor.

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

• EU Green Bond Standard finalised - what should issuers consider?
• What ESG investors want - ESG expectations in the US and Europe
• NatWest Group and WWF announce strategic partnership for UK food and agriculture

For the full monthly newsletter login to Agile Markets. Don’t have access? Contact us here.

Or, for Corporates looking to discuss any of the above further, please reach out to our authors:

• Dr Arthur Krebbers, Head of Corporate Climate and ESG Capital Markets
• Gustavo Brianza, Head of Debt & ESG Advisory
• Daniel Bressler, Climate and ESG Capital Markets
• James Lander, Credit Trader
• Philippe Bradshaw, Head of European Syndicate
• Rui Zu, ESG Advisory
• Thomas Gidman, ESG Advisory
• Dean Shahfar, Sustainable Finance UK
• Pietro Stimamiglio, Climate and ESG Capital Markets
• Niceasia Mc Perry, Climate and ESG Capital Markets

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