Navigating decarbonisation despite volatile macro backdrop

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

  • ECB introduces climate scores to decarbonise corporate portfolio. The European Central Bank (ECB) has announced details on its plans to decarbonise its €387 billion corporate bond holdings starting in October; in order to do so it will introduce climate scores that will be incorporated into future purchase decisions. These will be considered in all Eurosystem corporate bond purchases, including the €344 billion corporate sector purchase programme (CSPP) and the €43 billion pandemic emergency purchase programme (PEPP). This follows the ECB’s announcement in July of its plans to incorporate climate change into its monetary policy operations. The intention being to reduce the Eurosystem’s exposure to climate-related financial risk and support the transition of the economy to achieve the European Union’s (EU) climate neutrality objectives. Read more on what the ECB’s introduction of climate scores means.

  • EU plans to upgrade its Paris Agreement climate target. The EU is planning to raise its target to tackle global warming under the Paris climate agreement, according to a draft document, although the new goal is unlikely to be confirmed ahead of COP27 in November. The EU has already pledged to cut its net emissions 55% by 2030 from 1990 levels, one of the most ambitious goals amongst major economies, but officials hope to increase this target by a few percentage points. This is due to the fact that the bloc's package of climate policies was designed in July 2021 and some sections have since been made more ambitious. Despite several countries attempting to weaken proposals during negotiations, the draft document concludes that the EU “stands ready to update its Nationally Determined Contributions […] in due time”, with industry specialists suggesting this will materialise in 2023. Read more about how the EU plans to upgrade its Paris Agreement climate target.

  • EU lawmakers vote for Deforestation law. Members of the European Parliament (MEPs) voted to implement rules to ensure that products sold in the EU are not sourced from deforested or degraded land; the text adopted by the Parliament develops a proposal initiated by the European Commission in 2021. The UN-backed “Race to Zero” recently produced a report highlighting that deforestation attributable to companies with land-based value chains – particularly in the forest, land and agriculture sectors – is responsible for 22% of global emissions. Not only did the EU Parliament’s updated proposal extend the products and commodities put forward in the Commission’s draft (including pig-meat, poultry and rubber); it also strengthened the rules around financial institutions’ support of projects linked to deforestation. Read more about the EU vote for the Deforestation law.


Reporting: WEF claims ESG reporting is driving transformation, but companies struggle with competing guidelines

According to new case studies released by the World Economic Forum (WEF); ESG reporting frameworks are driving transformation globally, notably in sustainability and company culture.

The case studies identified specific strategic and operational changes made within companies reporting on the WEF’s Stakeholder Capitalism Metrics, including new approaches to water management and the implementation of biodiversity strategies and targets.

The WEF have found however, that companies were still struggling with the “competing and disparate” ESG frameworks that currently exist around the world; it also raised concerns that making reporting mandatory could lead to lower transparency as companies may decide against disclosing more than they are required to.

Read more about the WEF and its claims that ESG reporting is driving transformation.

Reporting: SBTi launches new framework to decarbonise the cement industry

The Science Based Targets initiative (SBTi) launched the first framework for the cement and concrete industry, providing a standard method for companies to set near and long-term science-based targets, in line with 1.5°C decarbonisation.

The framework addresses clinker, cement and concrete manufacturers; companies in the value chain that do not produce their own cement materials; users of cement such as construction businesses; and producers of binders and cement replacements.

The SBTI’s guidance covers essential aspects related to target setting and validation processes (including clarifying key definitions); it was developed with the help of an independent Expert Advisory Group consisting of academia, civil society and businesses. 

Read more about how the SBTi has launched a new framework to decarbonise the cement industry.

Ratings: Morningstar flags the hidden risks of sustainable companies

Research provider Morningstar has flagged the “hidden” ESG risks posed by companies deemed to be aligned with positive impact goals. Morningstar stated that a company’s alignment with the UN’s Sustainable Development Goals (SDGs) does not necessarily prevent exposure to a plethora of ESG risks.

58% of the 74 companies identified as having at least half their revenues aligned with SDGs have either a “medium” "or “high” Sustainalytics ESG risk score, which indicates that they face significant risks in other ESG segments. Similarly, Morningstar suggested that only a third of sustainability-focussed thematic investment funds (out of 750) receive an “above average” or “high” Sustainalytics sustainability rating. 

Read more about Morningstar’s analysis of sustainable companies, and their risks.

Ratings: Sustainable Fitch launches ESG ratings product for investors

Fitch’s ESG Ratings are assigned on an absolute basis rather than being sector-relative and Fitch aims to provide investors with more granular data, distinguishing between entities, frameworks and instruments. Each of the three is concerned with measuring the impact on the environment and society, albeit from different perspectives.

Whilst Framework Ratings are concerned with an issuing entity’s Key Performance Indicators (KPIs) or Use of Proceeds (UoP) structures, on the robustness of a framework’s governance, Entity Ratings evaluate factors such as a company’s overall strategy and its underlying business activities. Instrument Ratings integrate the two approaches described above.

Sustainable Fitch’s initial dataset covers labelled and KPI-linked instruments with a value of half a trillion dollars issued by entities in Europe, North America and the UK. Fitch’s objective is to rate the entire sustainability-labelled fixed income market by early 2023.

Read more about Sustainable Fitch’s new ESG ratings product for investors.

Capital Markets

Primary Market

Alliander, green bond. Alliander, a Dutch utility company issued a €500m 5yr green bond. The transaction marked Alliander’s fifth green bond issuance, following its last green bond issuance in June 2020. Alliander now has €1.7bn green bonds outstanding. >50% of Alliander’s debt can be classified as green. It comes off the back of its Green Finance Framework from August 2022; which includes their International Capital Market Association (ICMA) aligned Renewable Energy, Energy Efficiency, and Green buildings project categories. Their framework is aligned with the ICMA 2021 Green Bond Principles, the Loan Market Association (LMA) 2021 Green Loan Principles and is partially aligned with the EU taxonomy. Read more about Alliander’s green bond.

Knorr-Bremse, sustainability-linked bond (SLB). Knorr-Bremse, a German manufacturer of rail and train braking systems, launched an inaugural €700m 5yr Sustainability-Linked Bond. The Framework has been established in accordance with the ICMA Sustainability-Linked Bond Principles (SLBP) 2020 and the LMA Sustainability-Linked Loan Principles (SLLP) 2022. Although it is marketed as a “Bond Framework” the document explicitly references a number of fixed income instruments such as covered/secured or unsecured bonds, convertible bonds, loans, Schuldscheine and commercial papers. The SLB is structured around a “target to set a target” i.e. commit to setting and report on a SBTi approved Greenhouse Gas (GHG) Emissions target for Knorr-Bremse’s Scope 3 emissions, which represent over 99% of the issuer’s emissions. Read more about Knorr-Bremse’s SLB.

Koninklijke KPN, green hybrid bond. Koninklijke KPN, a telecommunications and IT provider in the Netherlands, issued a PerpNC5 €500m green hybrid bond. KPN released a new green finance framework in July 2022 that includes ICMA GBP aligned projects categories like energy efficiency, circular economy, clean transportation, for use of proceeds. This issuance is KPN’s first in a green format, following its previous sustainability-linked issuance in 2021 using a separate sustainability-linked financing framework. Read more about KPN’s green hybrid bond.

Anglo American, SLB. Anglo American, a global mining company, launched its Sustainability-Linked Financing Framework and issued a €745m 10yr inaugural SLB. This is the first investment grade mining company in the EUR market to issue in ESG format. The Framework has been established in accordance with the ICMA SLBP 2020 and the LMA SLLP 2022. The Framework includes 2 environmental KPIs (i.e. Scope 1 & 2 and fresh water abstraction in water scarce areas) and 1 social KPI (i.e. number of jobs supported off site for every job on site) all with 2030 targets. Read more about Anglo American’s SLB.

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 at NatWest Corporates & Institutions here.

Carbon Markets

Insurance broker Howden launches VCC insurance to increase confidence in the VCM

Insurance broker Howden recently announced the launch of the “world’s-first” Voluntary Carbon Credit (VCC) insurance product, to limit fraud and negligence and bring more confidence to the Voluntary Carbon Market (VCM). To develop the product, Howden partnered with Respira International and Nephila Capital. Read more about Howden’s new VCC insurance product.


Mirova expands fixed income funds with the launch of two sustainable bond funds

Mirova, the subsidiary of Natixis Investment Managers has launched two sustainable bond funds. The Article 9 bond funds – The Mirova Euro High Yield Sustainable Bond Fund and The Mirova Euro Short Term Sustainable Bond Fund – will invest in both green and social bonds as well as conventional bonds from corporates that contribute to energy transition. 

Read more on Mirova’s expansion of their fixed income funds.

NBIM sets net zero target for portfolio firms

Norway’s Wealth Fund expects its portfolio companies to hit net zero by 2050 as outlined in its recent 2025 Climate Action Plan. Norges Bank Investment Management (NBIM) is one of the world’s largest sovereign-wealth funds and holds more than $1.1 trillion in assets. It has a stake in more than 9,000 companies in 70 countries. 

Read more about how NBIM sets net zero targets for its portfolio firms.

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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