Private Finance ESG Monthly – 23 February 2022

Breaking down trending ESG trades & themes to help those within Private Finance get ahead of the latest issues shaping the market.

  • Volume of sustainable lending for January 2022 was up 21% from the same period last year; ending the month with $13.8bn in activity.
  • Despite flourishing towards the end of 2021, green lending volumes barely made it off the ground in Jan. Whilst the increasingly ubiquitous Sustainability-Linked Loan (SLL) drove the bulk of ESG lending activity.
  • Transactions from the Spanish Telecommunications sector – Telefónica and Cellnex Telecom – contributed to the majority of lending volumes.

Global ESG Syndicated Lending, Jan 2021 Vs 2022 ($ billion)

Source: Dealogic, 18/02/22

ESG Deal Activity

Antin Infrastructure Partners’ mid-cap fund entered into a €750m sustainability-linked equity bridge facility that included sustainability performance targets centred around: climate change mitigation, occupational health and safety, and human capital management.

DWS announced that it will soon launch a €500m green bond for its real estate fund, Grundbesitz Europa. The real estate fund is designed under Article 8 of the Sustainable Finance Disclosure Regulation (SFDR), with the inaugural green bond proceeds being used to support the fund’s ESG objectives of ‘reducing building energy consumption and carbon emissions’.

Abac Capital incorporated ESG metrics to fund the Capital Call Bridge Facility; linked to its second fund Abac Sustainable Value II. The facility’s margin is linked to performance of the companies in the fund’s portfolio, based on 3 ESG metrics: 1) Greenhouse Gas (GHG) emissions reporting in line with set targets; 2) gender diversity in management teams; and 3) establishment of governance policies.

Fibra EXI, the energy and infrastructure investment trust of Mexico Infrastructure Partners, received a 3-year SLL. The financing rate was linked to a sustainability indicator; reduce energy intensity from non-renewable energy sources, per kilometre of the highways operated by Fibra EXI.

Spotlight: Net Zero Asset Managers Initiative, Progress Report

The Net Zero Asset Managers initiative (NZAM) is an international group of asset managers that are committed to supporting the goal of net-zero GHG emissions by 2050 or sooner – in line with global efforts to limit warming to 1.5°C. The initiative was launched in December 2020 with an initial group of 30 signatories.

To recap, NZAM signatories must comply with a 10-point commitment and asset managers are required to disclose the following within 12 months of signing up to the initiative:

  • The initial percentage of their portfolio that will be managed in line with net-zero
  • Their ‘fair-share’ interim targets for the assets under management (AUM) that will be managed in line with net-zero, and the target date
  • The methodology used in target setting

Since the launch of the initiative in December 2020, 220 signatories have joined in over 5 waves of public announcements. The first 30 signatories who joined the initiative in December 2020 were required to disclose their initial proportions of AUM to be managed in line with net-zero, and interim targets, within one year of joining the initiative – and if possible, ahead of COP26. Other more recent signatories were also encouraged to make initial disclosures in this timeframe. In the first round of early disclosures, 43 signatories submitted their initial targets.

When analysing this month’s NZAM Progress Report, we surfaced some notable insights. The full report can be found here.

1. There are a number of targets used by asset managers, ‘intensity’ being the most prominent

Source: Net Zero Asset Managers Initiative Progress Report: NatWest Markets analysis

Note: AOA = Asset Owner Alliance; NZ = Net zero; TPI = Transition Pathway Initiative; ‘Other’ includes as yet undefined targets (in this case for Aviva Investors Sovereign and Infrastructure targets. 86 total targets identified across 44 asset managers, BMO Global Asset Management Canada and EMEA considered separately)

Asset managers differ in their target-setting characteristics in a number of ways. Be that in terms of the number of targets they adopt, the horizon across each of these, or the type of targets or ‘target categories’ they have chosen.

Considering targets across each asset manager and ‘classifying’ each into categories has surfaced some interesting themes: across the 86 targets set across all asset managers, we found 14 categories overall. The most prominent amongst these were ‘Intensity-based’ targets at c.40%, followed by c.20% which broadly consider AUM that is net-zero aligned.

Whilst perhaps not surprising to see these two areas front and centre, the spectrum across the board is interesting to note i.e. asset managers can vary significantly in their focus areas and approach to net-zero.

2. Even amongst ‘Intensity-based’ targets, individual measures vary

Source: New Zero Asset Managers initiative Progress Report: NatWest Markets analysis

Note: Total ‘intensity’ based targets = 35. ‘Other’ includes measures that are undefined, specific nuances with respect to Real Estate, or when measures are based relative to a particular reference or index. For Sarasin & Partners LLP, both ‘sales and ‘enterprise value’ included given their unknown preference for both of these. Example measures: Invested amount: e.g. tCO2e/$mn invested; Sales: e,g tCO2e / mn$ sales ; Enterprise Value; e.g tCO2e/mSEK EVIC.  

Intensity-based targets were the most common, however even amongst these, nuances existed. Targets themselves, or underlying baselines, were underpinned by: enterprise value related metrics (e.g. EVIC), invested amount, or sales/turnover. There were also ‘other’ areas, such as when measures remained undefined, or when certain nuances were present in relation to a particular sector (e.g. real estate).

3. Whilst the initial median of AUM committed to be managed in line with net-zero was c.60%, only c.35% of overall AUM across all asset managers has been committed to date

Source: Net Zero Asset Managers initiative Progress Report: NatWest Markets analysis

Note: Maitri Asset Management is not included in the AUM table as the AUM amount is undisclosed.  For Maitri, a 50% commitment is shown in the bar chart above. Excluding Maitri Asset Management, the median % committed would still remain at 60%. *NWM estimates; $11.9trillion per NZAM progress report.

The chart maps each asset manager against their respective percentage AUM initially committed (and therefore uncommitted) to be managed in line with net-zero. Whilst there are a number who have committed in full, and although the median committed proportion across the asset managers is relatively high at c.60%, when comparing this to the total AUM managed across all firms (c.$12tn), only c.35% of absolute AUM has been committed – suggesting that overall asset managers could still be doing a lot more to move the needle.

4. 2019 and 2020 are the most prominent baseline years used, whilst 2030 is the most prominent target year 

Source: Net Zero Asset Managers initiative Progress Report: NatWest Markets analysis

In terms of target years, asset managers are skewed towards the medium term, with over 60% of targets looking at a 2030 timeline. In the near term, 2025 is the most prominent at c.22% of targets. 2050 is the outermost selected to date, with c.7% of targets considering this milestone.

Latest Climate and ESG Announcements by Sponsors

  • EQT announces the planned acquisition of British Electronic Vehicle (EV) charging firm InstaVolt. EQT has agreed to acquire InstaVolt, who operate 700 charging points for electric vehicles across the UK, from Zouk Capital, for an undisclosed sum. Since 2019, EV take-up has more than trebled, but charging points have only increased by 70%. Read more on the EQT acquisition of InstaVolt
  • Aviva targets companies on biodiversity and human rights. Labelled ‘an engagement programme with teeth', Aviva has stated that it will divest in cases where companies consistently fail to meet its requirements. Mark Versey, Chief Executive Officer at Aviva Investors, has called for every company to develop a climate transition plan which looks at the whole picture on sustainability. Read more on Aviva
  • Blackstone launches renewables private credit strategy. The platform will invest in investment grade and non-investment grade credit, preferred and convertible securities, and sustainability-linked / green loans. Whilst the focus areas include: residential solar and home efficiency, renewable energy generation and storage, natural resources that support the energy transition, and low-carbon transport projects. Read more on Blackstone 
  • J.P. Morgan will invest $150m in 'climate solution' companies. J.P. Morgan Asset Management has said a newly appointed private equity investment team will be given (up to) $150 million to invest in sustainable, growth-stage, private companies. Read more on J.P. Morgan
  • Robeco will begin assessing biodiversity impacts at an issuer level. Robeco aims to extend its assessment of how its investments are exposed to biodiversity impacts and dependencies beyond the sub-industry level, by assessing these factors at a company level. Read more here and also take a look at Robeco’s paper.
  • NextEra Capital solar fund beats target by $146m. The total capital pool for the investment strategy of NextPower III ESG (NPIII ESG) exceeds $905 million – including co-investments – making it the firm's ‘largest private fund’. Read more on the NextEra Capital solar fund
  • Cantor Fitzgerald will launch a Megatrend-Focused Sustainable Infrastructure Fund: The Cantor Fitzgerald Sustainable Infrastructure Fund will be focused on key infrastructure megatrends including digital transformation, decarbonisation, and enhancement of aging infrastructure assets. Read more on Cantor Fitzgerald

Government and Regulatory Updates

EBA publishes binding standards on Pillar 3 disclosures on ESG risks

The European Banking Authority (EBA) has published its final draft; implementing technical standards (ITS) on Pillar 3 disclosures on ESG risks. The final draft ITS puts forward comparable disclosures to show (1) how climate change may exacerbate other risks within institutions’ balance sheets (2) how institutions are mitigating those risks, and (3) their ratios, including the GAR, on exposures financing taxonomy-aligned activities, such as those consistent with the Paris agreement goals. Read more on the EBA

NZAOA aims to halve emissions by 2030

Members of the Net Zero Asset Owners Alliance (NZAOA), representing $10 trillion of assets, have pledged to target reducing their absolute or intensity portfolio emissions by at least half by 2030. Read more on NZAOA

ISS ESG: Nuclear and gas have no positive sustainability impact

Nuclear and gas energy generation – which the EU has proposed including in its taxonomy of sustainable activities – have “no net positive” sustainability impact, according to ISS ESG. Both activities can bring some benefits in the transition to a low-carbon economy but cannot be considered sustainable in the long-term, ISS has said. Read more on ISS ESG

Real estate decarbonisation standard under construction

Real estate decarbonisation pathways that are “fully aligned with 1.5°C” will be published following collaboration between the Science-Based Targets initiative (SBTi) and the Carbon Risk Real Estate Monitor initiative (CRREM), which will combine their existing methodologies for operational emissions from real estate. Read more on the SBTi and CRREM

ESG Data, Articles & Market initiatives

UBS, Standard Chartered, and BNP Paribas join NatWest Group, CIBC, Itaú Unibanco, and National Australia Bank in developing new voluntary carbon market settlement platform. The founding members of Project Carbon, a group of financial institutions developing a new technology platform for the voluntary carbon market, announced a new name for the initiative, and three new founding members. Read more on the founding members of Project Carbon

An investor group, that includes Aviva, BlackRock and Macquarie, draft an ESG covenant package for Infrastructure Finance. The ESG Covenant Package is designed to develop a unified approach on ESG-related information and reporting requirements for infrastructure debt financings. The package is largely based on the EU’s SFDR, and focuses primarily on ESG reporting obligations. Read more on the ESG reporting obligations.

TPI: Investors need better scenario data. Investors would benefit from climate-related scenarios being focused on their needs rather than on the requirements of policymakers, research led by the Transition Pathway Initiative (TPI) has said. Modellers often produce scenarios that are relevant for policymakers in showing how much different outcomes of climate change are going to cost the economy, but investors require more. Read more on TPI

EU carbon prices expected to surpass €130 before year end. Berenberg Bank's head of carbon utilities and research, Lawson Steele, estimates that the prices of EU allowances will peak in 2023 at €150/t. Read more on EU carbon prices

Upcoming Webinars

  • NatWest ESG Regulatory Review (25 February 1:00 PM – 1:45 PM GMT). Green Asset Ratios and EU Taxonomy KPIs: What do they mean for banks, corporates and investors?
  • NatWest Biodiversity Webinar (2 March 14:00 GMT) Financing and Investing Opportunities in Nature. The session will focus on the importance of considering biodiversity, the pending regulations and the challenges faced by issuers and investors.

For those looking to discuss any of the above further, please reach out to our authors:

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