“Implementation & Re-iteration”

Our takeaways from AFME’s 2023 European Sustainable Finance Conference

“Climate risks and nature risks are two sides of the same coin, hence tackling climate change and nature loss need to be considered as equally important tasks,” was a key statement from AFME’s 2nd Annual European Sustainable Finance conference. NatWest sponsored this key gathering of sustainability-focused asset managers, investment banks, regulators, policymakers, and wider ESG investing stakeholders. Caroline Haas, NatWest’s Head of Climate and ESG Capital Markets, and Dr Arthur Krebbers, NatWest’s Head of corporate Climate and ESG Capital Markets, led two panel sessions, focused on the evolution of ESG investment strategies as well as the global transition to net zero.

Across the two-day conference key messages for sustainable finance participants included: 

1. “Rome was not built in a day”:

Responsible investors should continue to re-iterate their investment objectives, and how ESG and impact goals overlay with risk-return requirements:

Amidst a fast-paced evolution, ESG investing is iterative, with investors focusing on the triangle of ESG risk, return and impact. Quantitative reporting and transition plans of corporates and organisations are the main data source for investors to calculate risks – however, transition plans often do not yet deliver all information investors require.  And there are different views on “what a good transition plan looks like”, there are three key details investors expect: 1) how executive pay is linked to ESG/transition performance; 2) How the transition plan impacts expected greenhouse gas (GHG) emissions performance (reduction per year/per project etc); 3) How the transition targets align with regulations within a jurisdiction.

2. Nature is set to become a critical component of ESG, being the “core infrastructure” of our economy:

While climate physical risks and nature risks are two sides of the same coin, nature is not the same as climate - which has been mostly in the focus over the last decade. However, the Biodiversity COP 15 and COP 27 have helped raise awareness for the urgent need to tackle biodiversity and nature loss and delivered a first biodiversity landmark agreement. Now, corporates and organisations need to start reporting on nature alongside their climate reporting – following the principle to not allow perfection to get in the way of progress. The focus needs to lie on starting nature reporting now, even if only offering a skeleton, as collecting relevant data will in most cases act as an eye opener and help shape corporate decisions that could impact nature/biodiversity. The new Task Force on Nature-related Financial Disclosures (TNFD), which launched in 2021, will provide crucial guidance. Additionally, investors are ready for nature/biodiversity targets to be part of financing. To further heighten awareness around the threat of nature loss and to help ‘rebuild’ nature, banks need to reduce or reject financing for projects that threaten nature/biodiversity, while voluntary carbon market on the other hand could help fund nature-based solutions.

3. SLBs have a role to play, and this market will improve.

Participants agreed on their ‘cautious optimism’ sentiment for the sustainability-linked bond (SLB) market, however, three key issues of SLB products need to be addressed: 1) the use of immaterial key performance indicators (KPIs); 2) non-stretching targets; and 3) the use of low or non-incentivising pricing step-ups if targets aren’t met. With the quality of KPIs for SLB products linked with an issuer’s ESG reporting, continuous improvements in the reporting should ensure better, stretching, and impact driven KPIs. At the same time, the panellists agreed that SLB products offer a big opportunity for corporates to raise funding linked to nature targets.

4. Regulation: now is a period of implementation and learning

Sustainable finance market participants are working with regulators to get clarifications on existing and emerging regulations. Investors and corporates are clear that regulators need to set standards for transition plans and define in detail what ‘transition finance’ entails (and how it differs from conventional finance). Furthermore, the panellists were clear that an important next step towards more clarity would be for the EU’s Corporate Sustainability Reporting Directive (CSRD) to expand and include sector specific guidelines.

If you want to hear more about any of the topics raised at the AFME conference, please contact the Climate and ESG Capital Markets team through your usual bank contact.

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