Market volatility hampering “greeniums” in primary market

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 to urge countries to toughen Climate Pledges by COP27 Summit. According to a draft document, the EU will urge the world’s largest economies to improve their climate change targets ahead of this year’s COP27 climate summit in Egypt. Despite a range of targets and commitments being set by countries after last year’s COP26 summit, the EU judges global climate action to be insufficient. The draft, which could be subject to change following negotiation over the next few weeks before it receives approval, stated polluters must revise their targets if the world is to stop global warming spiralling beyond 1.5°C. The EU is the world’s third-largest emitter after the US and China, with Beijing resisting calls from Europe to accelerate its plan to peak emissions by 2030. The fourth-biggest emitter, India, as well as G20 countries Indonesia and Mexico, are among those exploring more ambitious climate pledges. The EU’s own target is to cut its net emissions 55% by 2030 from a 1990 baseline, with recent proposals to expand renewable energy production strengthening the bloc’s target ahead of the summit. Read more on how the EU is urging countries to toughen their Climate Pledges.

  • The Inflation Reduction Act’s potential impact on climate transition. Further to last month’s update on the US climate deal, which outlined the hurdles the package would face, a consensus has finally been reached, with Joe Manchin, US Senator, and the Democrats obtaining the Senate votes they needed to pass the Inflation Reduction Act (IRA). The legislation is the largest climate bill in US history, committing $369 billion in spending; its main objectives are to build supply and demand for clean technologies and reduce emissions by 40% by 2023. In addition, the bill incorporates tax credits and rebates for consumers who seek to switch away from fossil fuels with heat pumps and electric vehicles, whilst also supporting industry to build factories and manufacture new clean technologies. Although the IRA’s reach is mostly domestic, it may give rise to a “green vortex”, according to numerous experts. For instance, a likely effect of the bill on the global economy is to potentially lower the cost of wind, solar, batteries, and other crucial technologies for decarbonising, thereby facilitating less affluent countries in purchasing green alternatives. In addition, it may stimulate the striking of more agreements like last year’s US–EU Union steel arrangement, favouring the imposition of higher global environmental standards. Read more about the impact of the Inflation Reduction Act.

Societal Developments

  • OECD fighting climate change research: International attitudes toward climate policies. The Organisation for Economic Co-operation and Development (OECD) published the results of a study on the understanding of, and attitudes toward, climate change and climate policies. The study was based on surveys of more than 40,000 respondents in twenty countries that account for 72% of global CO2 emissions. Across countries, support for climate policies hinges on three key factors: (1) the perceived effectiveness of the policies in reducing emissions, (2) their perceived distributional impacts on lower-income households (inequality concerns), and (3) their own household’s gains and losses. The study also shows that information that specifically addresses these key concerns can substantially increase the support for climate policies in many countries. Furthermore, there is evidence of how several socioeconomic and lifestyle factors – most notably education, political leanings, car usage, and availability of public transportation – are significantly correlated with both policy views and overall reasoning and beliefs about climate policies. Read more about the OECD’s research on fighting climate change.


Reporting: SBTi rules out mandating annual target reviews

Following criticism from academics in a paper in the Nature Communications Journal, which claimed that Science Based Targets Initiative (SBTi) methodologies fail to satisfy the requirements to meet the 1.5°C global warming target, the SBTi has confirmed that it will not mandate companies to annually review emissions reductions targets.

Whilst the SBTi is supportive of company targets undergoing regular adjustments to reflect deviations, it stated that an annual review was not a realistic prospect as it was too costly and time-intensive. Furthermore, the SBTi stated that maintaining the current five-year review model accommodates the non-linear trajectory of several decarbonisation strategies.

It also rejected the use of 2015 as a universal base year, as it is likely to result in distortions and, in some instances, in selecting a less ambitious base year for a company. The SBTi did, however, add that it will use the recommendations from the paper as part of its framework review in 2023, so as to stay aligned with the best available science. Read more about why the SBTi has decided not to mandate companies to annually review emissions reductions targets.

Reporting: UK Regulators find confusion in companies’ TCFD disclosures

A review by the Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) of almost 200 large companies subject to the UK Government’s new disclosure mandate, has revealed that many are yet to produce a high-quality report that covers all key aspects of the framework.

Scenario analysis, whereby companies assess climate-related risks and opportunities under different temperature increase trajectories, was found to be the most common reporting gap, with 24% of companies reviewed not consistent with the Task Force on Climate-related Financial Disclosures (TCFD) on this.

Furthermore, the FCA found that many of the companies’ net zero statements referencing 2030 or earlier did not cover each company’s entire value chain, but rather only their direct business or operations. It should be noted that non-compliance by companies with the Government’s new disclosure mandate can result in fines of a minimum of £2,500 and a maximum of £50,000. Read more about the confusion in companies’ TCFD disclosures.

Ratings: Can high ESG ratings help sustain dividend growth?

ESG rating agency ISS published a case study of over 500 US large and mid-cap equities seeking to identify the relationship between ESG ratings and dividend growth; the two key metrics utilised were ISS’s ESG Corporate Rating and the companies’ dividends paid between 2018 and 2021. 

Businesses that failed to pay dividends throughout the whole period – potentially due to the effects of the pandemic – were excluded from the findings, with the final dataset containing just over 400 securities. The analysis found that whilst there appears to be insufficient evidence to conclude that lower ESG ratings result in lower dividend growth, lower-rated entities’ dividend growth rates experience significantly higher standard deviation figures (2.7 vis-à-vis 0.59 for businesses with high ESG ratings). The analysis suggests that lower ESG ratings seem to provide investors with lower predictability.

In addition, not only did companies with higher ESG ratings display a considerably lower likelihood of cutting or eliminating dividends but they also consistently delivered higher dividend growth. Read more to understand whether high ESG ratings help sustain dividend growth.

Ratings: Deloitte launches end-to-end sustainability solutions suite with SAP

Global professional services firm Deloitte has announced the launch of a suite of sustainability solutions built on Systems Applications and Products (SAP) technology. The new solutions include ESG strategy, Performance & Reporting, Climate & Decarbonisation, Sustainable Supply Chains, and Financing Sustainability.

The new offering comes as both organisations work to ramp up their capabilities and solutions aimed at helping clients manage increasing sustainability and climate challenges. Deloitte also unveiled a roadmap for future sustainability offerings, including an upcoming “ESG Reporting as a Service” solution. Read more about Deloitte and SAP’s end-to-end sustainability solutions suite.

Capital Markets

Primary Market

Market volatility hampering “greeniums” in primary

  • Volatility during the summer period led to an increased new issue premium (NIP) and also reduced the “greenium” in the high beta space.
  • However, defensive names, such as Alliander or Henkel, are still benefitting from stronger market appetite further boosted by their Green Use of Proceeds or Sustainability-Linked features.
  • In this context, pre-marketing can help investors digest the ESG story and take advantage of swift execution when the right window opens.

Henkel, Sustainability-Linked Bond (SLB)
. German consumer goods producer Henkel issued a Sustainability-Linked bond, on which NatWest acted as Bookrunner. The bond was off its Sustainable Finance Framework; which covers green Use of Proceeds (UoP) bonds and SLB. The company has three key performance indicators included in the framework and for this trade it included the two 2025 targets to align with the instrument tenor (5y). Read more about Henkel’s SLB.

Prologis European Logistics Fund, green bond
. Pan-European logistics real estate company Prologis International Funding II SA (PELF) issued an inaugural green bond in the Sterling market, on which NatWest acted as Bookrunner. PELF was the first ever logistics real estate green Eurobond issuer in 2018 and has issued five Euro Green bonds totalling €2.0bn since. At this time, 90% of PELF’s outstanding bonds are green bonds (by volume). Read more about PELF’s green bond.

Compass Group, sustainability bond
. Compass, a global food services company, issued an inaugural dual-trance EUR and GBP bond in Sustainability format, on which NatWest acted as Sole Sustainability Coordinator and Bookrunner. The Framework includes a ground-breaking approach to the UoP format, where the Company’s operating expenditure forms a key part of how proceeds are allocated, given the direct and indirect contribution of these expenditures to the Company’s Sustainability targets. The Carbon Trust provided a Second Party Opinion. Read more about Compass’ sustainability bond.

Ford Motor, green bond
. Ford Motor issued in green format to help boost its development of more electric vehicles. The transaction was launched off the company’s Sustainable Financing Framework, a similar approach to General Motors earlier this month. Read more about Ford Motor’s green bond.

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

Draft carbon principles for the voluntary carbon market released by ICVCM

The Integrity Council for the Voluntary Carbon Market (ICVCM), an independent governance body for the voluntary carbon market which was established as an outcome of the Taskforce on Scaling Voluntary Carbon Markets, has released its draft Core Carbon Principles (CCPs), along with an accompanying Assessment Framework and Assessment Procedure (Assessment Framework) for public consultation.

The principles aim to establish a consistent and standardised guide to assess the recognition of high-quality carbon credits issued under voluntary schemes with the purpose of creating a market which achieves real verifiable climate change impact with environmental and social integrity.

Following the public consultation which ends in September 2022, the Assessment Framework is intended to be used to assess carbon-crediting programmes and credit types against the CCPs, commencing in 2023. Read more about the carbon principles drafted by the ICVCM.


NN IP corporate green bond fund passes €1bn milestone

The corporate green bond fund of NN Investment Partners (“NN IP”) has passed the €1 billion assets milestone less than three years after launching, becoming the second green bond fund at the Dutch asset manager to achieve this landmark.

According to the investor, interest in the corporate green bond fund had been supported by the fact that the characteristics of the fund are quite different from a normal corporate bond fund, which is making it easier for investors to ‘greenify’ their portfolios. Read more about NN Investment Partners and their €1bn milestone

Amundi launches short-term corporate green bond fund

Aktia has launched the new UI-Aktia Sustainable Corporate Bond fund classified as a so-called “dark green” fund in accordance with Article 9 of the EU Sustainable Finance Disclosure Regulation (SFDR).

The fund invests only in green, social, and responsible bonds as well as SLBs, and each investment object is also required to have a positive net impact, considering, for example, the impact on society and the environment. Net impact of investments on the social and ecological environment are analysed and reported through the AI-based impact tool developed by the Finnish Upright Project. Read more about the launch of Amundi’s short-term corporate green bond fund.

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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