• ECB signals overhaul of climate bond purchase strategy. The European Central Bank (ECB) could look to significantly amend its existing bond purchasing strategy, steering towards issuers with higher climate scores, whilst potentially divesting from others, to support decarbonisation efforts. The scores are dependent on factors such as issuers’ carbon intensity, the quality of their climate-related disclosures and their decarbonisation plans. In a speech delivered at a conference, held by Sveriges Riksbank, executive board member Isabel Schnabel said the central bank needed to move from its current approach to one that would reshuffle its €345 billion corporate bond portfolio towards greener issuers. The ECB will seek to reduce the emissions of its sovereign and public sector bond holdings, to ensure that they are aligned with the goals of the Paris agreement; however, this is proving difficult partly because of the lack of a reliable framework to assess the extent to which sovereign bond portfolios are aligned with the Paris Agreement.
• Federal reserve launches pilot climate scenario analysis exercise. The Federal Reserve (Fed) has launched a pilot scheme to better understand the policies and systems big banking organisations have in place to cope with climate change-related risks and obstacles. The Fed has said that the purpose of the exercise includes: building a deeper understanding of climate risk management practices; building capacity to identify, measure, monitor, and manage climate-related financial risks at the banks and supervisors. The new scheme will evaluate both physical risks, linked to the potential harm climate-related events may inflict on people and property, and transition challenges that are related to the shift to a lower carbon economy. The six largest financial institutions will have to revert to the Fed with estimates of the proposed scenarios’ impacts on financial metrics, such as loss given default (LGD) and internal risk rating grade (RRG).

Reporting: FRC updates statement of intent on ESG

The Financial Reporting Council (FRC), the UK regulator for auditors, accountants, and actuaries, released an update to their original statement of intent from 2021, as auditors in particular are increasingly offering services related to the review of non-financial information.

The statement outlines multiple areas the FRC aims to work on going forward, including: “developing guidance and best practice on the distribution and consumption of ESG data”; introducing requirements for actuaries to account for climate and other ESG risks in their work; continuing to ensure FRC audit quality inspections pay particular attention to work on climate-related risks and revising the UK Corporate Governance Code so that it adequately reflects the importance of ESG reporting. 

Reporting: ESMA issues its first opinion on the draft ESRS

The European Securities and Markets Authority (ESMA) stated that the first draft of the European Sustainability Reporting Standards (ESRS), which outlined corporate requirements relating to reporting of a number of ESG issues, was “broadly capable” of meeting the objective of being conducive to investor protection and not undermining financial stability.

ESMA set out selected technical issues, such as consistency with other EU Regulation, like the Corporate Sustainability Reporting Directive (CSRD), and improved guidance on the materiality assessment process that would need amending for ESMA to view the ESRS as “fully capable”.

The European Commission will now contemplate ESMA’s opinion alongside those from other public bodies and adopt ESRS into delegated acts by 30th June 2023.

Reporting: US releases natural capital accounting system

The Biden-Harris administration launched the National Strategy to Develop Statistics for Environmental-Economic Decisions, which marks the beginning of a multi-year project to improve data on natural capital and its contributions to the US economy. Currently, economic statistics for the US do not account for the value or function of natural assets such as land, water, minerals, and plants.

The new National Strategy aims to reduce the knowledge gap surrounding the link between nature and the economy. In turn, this will help policymakers, banks, regulators, and other stakeholders make more informed decisions and secure future nature-dependent economic opportunities.

Ratings and data: The economic impact of ESG ratings

According to a study published by researchers at MIT and the University of St. Gallen (amongst others), changes in a company’s ESG rating have been linked to changes in stock returns. The study was aimed at assessing the impact of MSCI ESG ratings (rather than a broader set of agencies) on mutual fund holdings, stock returns, corporate investment, and corporate ESG practices.

The researchers found a positive relationship between a company’s MSCI sustainability rating and ownership by US mutual funds with a dedicated ESG strategy. They also found that the negative ratings had a long-term, negative relationship with stock returns, whilst rating upgrades had a slower and weaker positive correlation to returns. The paper concluded that whilst ESG rating changes impacted the financial markets, there was limited evidenced impact of ESG ratings on the real economy and the growth of a company. 

Ratings and data: ECB publishes new climate-related statistical indicators to narrow climate data gap

The European Central Bank (ECB) published a series of climate-related statistical indicators aimed at improving the assessment of impacts on the financial industry, by climate-related risks, and monitoring developments in sustainable and green finance. Executive board member Isabel Schnabel has stated that the indicators will help improve understanding of how climate change will affect the financial sector and vice versa.

The project includes three sets of analytical indicators covering sustainable finance, financed emissions and climate-related physical risks on loans. The ECB has noted that these indicators are a work in progress and are intended to engage key stakeholders to better capture data on climate-related risks and the green transition.

The development of these indicators is a step towards fulfilling commitments made in the ECB’s climate action plan published in July 2022, which detailed initiatives to incorporate climate change considerations into its monetary framework. 

Ratings and data: Flaws with scope 3 greenhouse gas emission data may lead to suboptimal portfolio construction

Osmosis Investment Management suggests that utilising estimates of Scope 3 emissions could result in portfolios that are biased towards low-revenue companies. The paper stated that using revenue-based methodology to estimate Scope 3 data in portfolio construction is “misguided” and any claimed environmental benefits are “unfounded, and from a financial perspective, they would argue it is “irresponsible”.

The London-based investment manager said investors should not consider evaluating company performance on Scope 3 data if it is considered immaterial or outside of management’s control. To overcome the issues raised in the report, a more granular approach to data is needed alongside further research. 

Primary Market

Iberdrola, green hybrid. Iberdrola Finanzas SA issued off their 2022 framework for green financing (International Capital Market Association (ICMA), Loan Market Association (LMA) and EU Green Bond Standard (GBS) aligned), which was rated “Advanced”, the highest level by VigeoEiris the Second Party Opinion provider.

Telefonica, green hybrid. Telefonica Europe BV issued a €1bn green hybrid (PNC7.25), in support of the company’s target of raising €10bn through Sustainable Finance, which at the end of 2021 was sitting at €4.18bn. The proceeds will support eligible investments for energy efficiency in the network transformation, for example switching from copper to fibre optic (fixed network) and 5G deployment (mobile network), and also self-generation of renewable energy.

Abertis Infraestructuras, Sustainability-Linked Bond (SLB). Toll road operator Abertis Infraestructuras SA launched their inaugural €600mn SLB off the company’s sustainability-linked financing framework, published in June 2022 (SPO provided by Sustainalytics). The company selected 3 key performance indicators (KPIs): (1) absolute Scope 1 and 2 greenhouse gas (GHG) emissions, (2) Scope 3 (purchased goods and services), tCO2e per million km travelled by customers, (3) number of electric vehicle charging points (EVCPs) installed.

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.

Carbonplace announces CEO and secures $45 million in funding 

Voluntary Carbon Credit (VCC) transaction network Carbonplace raised USD 45 million in a strategic round of investment, as well as forming its own entity. The capital injection represents a commitment from some of the world’s largest financial institutions, including NatWest, to achieve Carbonplace’s vision of accelerating corporate climate action by providing transparent, secure and accessible carbon markets.

The new company intends to leverage this investment to scale the platform and its team to expand services to a wider client base of financial institutions and accelerate partnerships with additional carbon market participants, including registries and marketplaces around the world. 

Nearly a quarter of Article 9 funds failing ‘do no harm’ test 

Nearly a quarter of funds classified as Article 9 under Sustainable Finance Disclosure Regulation (SFDR) are failing in the regulation’s requirement to do “no significant harm”, according to new research by Clarity AI. Rather than being evidence of outright greenwashing, Clarity AI has concluded these failings were to do with challenges around the European ESG Template (EET). The market initially approached the gaps and uncertainty in the regulation in different ways, but the industry is now adjusting to incorporate new guidance published by regulators. 

ESG dominated European 2022 exchange-traded fund flows

ESG strategies dominated the exchange-traded fund (ETF) market in Europe in 2022, according to the latest data by Morningstar. 

ESG investments now represent 18.8% of total assets invested in ETFs and exchange-traded commodities (ETCs), up from 16.7% the year prior. The increase in ESG investment has been driven by investment in new ESG products and the repurposing of existing conventional funds as ESG funds. Total assets in bond ESG ETFs also grew from €54.1 billion in 2021 to €60.7 billion in 2022. Assets in bond ESG ETFs already represent 19.6% of total assets invested in bond ETFs in Europe. 

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

• ESG Private Placement: more action than talk 
• Sustainability-Linked Bond Watch Note: Q4 2022 
• ESG disclosure and labelling rules: a momentous task to drive sustainable investments
• NatWest Group awarded the Sustainable Markets Initiative’s Terra Carta seal 
• NatWest to stop reserve-based lending for oil and gas projects 

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
• Darren Hook, Head of IG Corporates Research
• 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.