Sustainability

Private Finance ESG Monthly – March 2022

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

ESG Syndicated Lending Market
  • Volume of sustainable lending for February 2022 was 37% higher than January; ending with $28.9bn in activity.
  • Spain and the US are responsible for the bulk of global sustainable lending ($18bn) Year to Date (YTD). However, Australia and China (incl. Hong Kong) are currently contributing to the majority of green lending activity.
  •  Recent geopolitical events may accelerate the energy transition creating more opportunities to allocate financing to green eligible activities.
  •  Notable transactions in February include Sustainability Linked Loans (SLL) for Axpo Holding, Schlumberger and S&P Global.

Global ESG Syndicated Lending, February 2022 YTD ($ billion)


Source: Dealogic, 29/03/22

ESG Deal Activity

Asset manager AMP Capital refinanced an AUD 1.8bn facility to a Green SLL for Reliance Rail. The loan facility is one of the first of its kind in Asia Pacific with interest savings on the loan to be used exclusively to fund sustainability initiatives such as carbon and emission reduction projects.

Ygrene completes $344m green securitization with the closing of the GoodGreen 2022-1 securitisation via the issuance of PACE – property assessed clean energy – investment grade debt securities. The securitisation provided financing to over 9,000 PACE assets covering residential and commercial properties located in California and Florida.

AXA IM Alts and Credit Agricole Assurances jointly acquired a 50% stake in a UK offshore windfarm for £3bn. The investment will be funded by a combination of equity and a senior multi-tranche financing package provided by a syndicate of 30 banks and includes a covered tranche guaranteed by EKF, Denmark’s export credit agency.

Spotlight: Carbon Markets

Carbon markets are key to supporting global decarbonisation

The carbon markets are a key enabler for the transition to a low carbon economy. Found in compliance or voluntary forms, both play significant roles in decarbonisation. The compliance markets aim to influence behaviour, encouraging companies to reduce their emissions by providing a regulated mechanism to establish carbon pricing, whilst the voluntary markets (VCM) aim to complement these efforts by seeking to remedy some of the shortfalls present in the compliance market, for example, 80% of greenhouse gas (GHG) emissions are not covered by regulated pricing schemes today [1].

Development of the VCM is key in reducing emissions that cannot be abated directly. As decarbonisation efforts accelerate, demand for voluntary offsetting through the use of carbon credits is expected to increase significantly (by ~15x in the next 10+ years reaching USD50-100bn in total value, driven by corporate net-zero ambitions, as seen in the figure below [2]).

Global carbon market growth


Source: Ecosystem Marketplace; Refinitiv, McKinsey & Company

Carbon offsetting is key enabler to achieving net zero commitments

As shown in last month’s newsletter which spotlighted the Net Zero Asset Managers Initiative (NZAMI), asset managers as a whole are making progress towards supporting the ambition to net zero by 2050 (or sooner). However, analysis indicated that whilst ‘median Assets under Management (AUM) initially committed to be managed in line with net zero’ stands at c.60%, only c.35% of overall AUM across the c.$12tn managed has been committed to date. 

The challenge is significant – alongside prioritising real world economy emissions reductions and creating investment products in line with net zero (among other key initiatives), signatories of the NZAMIalso agree to use carbon offsets that involve long term carbon removal when hard to abate emissions are present.

Carbon offsetting by asset managers: Notable use cases
BNP Paribas Asset Management [3] [4]
Overview
  • Fund: THEAM Quant - Bond Europe Climate Carbon Offset Plan
  • The fund aims to provide capital growth over the medium term and to offset its carbon footprint (Scope 1 and 2)
  • The fund provides exposure to a basket of European investment grade corporate Bonds with high ESG standards in line with Febelfin Towards sustainability initiative and UN Global compact principles
  • The residual carbon footprint of the portfolio is offset every quarter
  • Fund aims to offset carbon footprint of scope 1 and 2 emissions from investment strategy – ‘partial’ offsetting
  • The fund uses Verified Emission Reductions (VERs) from the Kasigau Corridor REDD+ project in Kenya
  • Project also aims to create long-term jobs and promote sustainable sources of income by encouraging local communities to preserve the forest and its biodiversity

Candriam [5]
Overview

  • Fund: Candriam Sustainable Equity Climate Action
  • Provides zero net carbon emission strategy; offsetting emissions via credits linked to green projects
  • Enables investors to compensate the carbon impact of their investments
  • The project types are in accordance World Bank standards, and target renewable energy, energy efficiency, and reforestation
  • 10% of the net management fees set aside to support sustainability initiatives as well as to clear the carbon footprint of the Fun

HanETF [6]

Overview

  • HanZero is a scheme by HanETF that purchases carbon credits to neutralise scope 1 and 2 emissions of a portfolio
  • Auditable and certificated climate-positive projects selected in partnership with leading carbon offset specialist, South Pole
  • The projects are assessed on the standards established by the International Carbon Reduction and Offset Alliance (subject to full screening, third party auditing and in house due diligence; e.g. Verra)
  • Example product; HANetf S&P Global Clean Energy Select HANzero™ UCITS ETF. This will be Europe’s first carbon offset exchange traded fund to give environmentally conscious investors the opportunity to target capital growth with the reassurance that any carbon emissions linked to their investment will be offset
  • Projects selected with South Pole target specific SDGs
  • Offering is flexible, enabling investors continuing to have exposure to high emitting sectors or those that negatively impact the SDGs to offset their emissions.

Aberdeen Standard [7]
Overview

  • Aberdeen Standard Investments (ASI) Real Estate uses offsets to reduce the carbon footprint of their real estate portfolio
  • Focus is on carbon reduction in the first instance: e.g. verified reductions from energy efficient measures; procured renewable energy; on-site renewable energy generation; fabric improvements
  • ASI only considers carbon offsetting as lever of last resort
  • ASI has explored various methods of offsetting across their funds and at the corporate level

Blackrock [8] [9]
Overview

  • BlackRock’s Liquid Environmentally Aware Funds “U.S. LEAF”, and “WeLeaf”, are both ESG solutions to existing cash investing products
  • At least 5% of the net revenue from Fund’s management fee is used to purchase carbon credits
  • Via The Adaptation Fund, credits are purchased in BlackRock’s Certified Emission Reduction account
  • Funds from purchase of credits are used for verified Clean Development Mechanism projects
  • Exclusion policies and revenue thresholds in place with respect to fossil fuels, thermal coal, nuclear energy

Cazenove Capital [10] [11] [12]
Overview

  • A Charity Responsible Multi-Asset Fund: Long term diversified investment fund
  • The fund is designed to meet charities aspirations of balancing needs of current beneficiaries and future generations
  • The fund will combine low-carbon investment approach with offset commitment on the residual emissions from its equity investments
  • Collaboration with ‘Ecologi’, a Bristol based social enterprise to source and monitor projects on their behalf
  • Cazenove will absorb the offset cost
  • Offset cost absorption testament to company’s sustainability commitment / ambition
  • Projects chosen will focus on biodiversity and reforestation.
  • Investors will see: 1.) direct impact of their assets’ carbon footprint; 2.) environmental projects supported; 3.) number of trees planted

Gresham House [13] [14]
Overview

  • Gresham House Forest Growth & Sustainability Strategy
  • Returns are generated through sale of timber and capital growth of land and trees from existing forests
  • Creation of >10,000 hectares of productive woodland will enable sequestration of carbon and generation of carbon credits
  • Investors will receive distribution in the form of carbon credits that can be retained for ‘insetting’ purposes (e.g. addressing emissions in portfolio) or sold to provide income
  • Gresham House has specialist expertise in woodland creation and management, having acquired 10,000 hectares of unplanted land for woodland creation since 2015
  • Gresham House planted more than 9m trees in 2020
  • Increasing the UK’s forestry stock supports the UK’s natural capital, therefore supporting the country’s climate, biodiversity, and flood mitigation

Foresight Group [15]
Overview

  • Provides investors with investment opportunities driven by prevailing supply / demand imbalance; inflation-protection qualities of UK land freeholds; and biological tree growth not correlated to financial markets
  • Offers access to carbon units related to carbon sequestration from new afforestation planting
    Target return of CPI+5%; £130m initially fundraised
  • Approach is aligned with 5 UN SDGs
  • Focuses on protecting the natural environment, enhancing biodiversity levels, making a positive contribution to carbon sequestration, and supporting rural communities 

In addition to the above further innovations are also being seen in the market. Earlier this month, Nasdaq launched the ‘world’s first index family that is focused exclusively on tracking the price of carbon removal credits. Nasdaq has three new commodity reference price indexes, based on Puro.earth’s Carbon Removal Certificates (CORCs), and aims to support the growth of the voluntary carbon removal market by creating the transparency needed to encourage investment and support project financing decisions. The indexes track the price of removing carbon dioxide from the atmosphere through the CORCs. The innovation is an exciting development for the voluntary markets, giving more visibility into the trends of carbon removal credit pricing [16].

Addressing other natural capitals

The progress required from a carbon perspective is clear, however what is becoming more prominent is the need to address issues across the natural capital spectrum - biodiversity in this sense is top of mind. Whilst climate change and biodiversity are interlinked, solutions that limit and / or remove carbon emissions may not necessarily reverse the biodiversity and species loss that has already been seen; market participants need to shift from targeting zero loss to a net gain. To this end, whilst nature-based carbon credits remain a key lever in delivering climate commitments, the impact they have on biodiversity is not always clear.  As a consequence, biodiversity credits are an emerging proposition that can in the future support these outcomes, working akin to today’s carbon credits where verified projects will be offered to investors to drive positive biodiversity outcomes [17].

As asset managers adopt strategies to de-risk their portfolios, consideration of other natural capital will be required to a greater extent. Asset managers, when purchasing carbon credits as part of their net zero strategies, should be minded to pay close attention to the degree of positive nature outcomes that are being driven in the interim until the biodiversity credit market becomes more established. Investors have to understand impacts at a project level given the degree of interconnectedness across local ecological and social contexts. Initiatives such as the Finance for Biodiversity platform and TNFD will help and support institutions providing guidance on data and metrics as well as building a biodiversity plan of action.

Innovation in the voluntary carbon credit markets

Considering markets for other ‘natural capital offsets’ (for the lack of a better term), there are several lessons that can be drawn from the challenges / developments that continue to be seen in the voluntary carbon credit market:

  1. Lacking structure and transparency: There is no widely accepted structure for VCM or a centralized carbon credits market. Project developers can sell credits directly to buyers, sell credits through a broker or an exchange, or sell to a retailer who then resells the credits to a buyer. Given this OTC nature, asset & transaction information is limited.
  2. Excess demand: There are a large number of low-quality credits that are contributing to recent growth figures. There is currently a demand / supply imbalance for high-quality credits.
  3. Complexity of Contract Execution: Transactions are bespoke and negotiated bilaterally; as a result, the legal demands are high.
  4. Client onboarding: Registries are inefficient in onboarding buyers and sellers. Buyers and sellers also need to onboard each other, which is not scalable.
  5. Counterparty Risk: Currently transactions rely on the buyer and seller trusting each other to provide delivery of either carbon credits or funding.
  6. Demonstrating ownership: Credits are held across multiple registries and platforms making the reporting and accounting of VCM inventory complex

These challenges are significant and limit market growth, however initiatives are emerging that are improving price transparency, accessibility, and the matching of buyers and sellers to support market build out.

‘Carbonplace’ is one such example - it’s a new platform (that NatWest is involved with, alongside 6 other banks) that creates a global record of ownership for carbon credits in the VCM, and enables greater access, trust, and transparency. The platform caters to banks and has a wallet built on the blockchain, where the ownership of the credit tokenized, and not the credit itself. A defining feature is how it enables settlement and clearing – implying that banks transact with each other on behalf of their customers, thereby mitigating Anti-Money Laundering (AML) and Know Your Customer (KYC) risks.

Going ahead, ClimateImpactX (CIX) and Carbonplace will be collaborating, marking another important milestone as the VCM scales further. Carbonplace’s unique settlement technology and wallet service to store and trade credits will combine with CIX’s curated marketplace of voluntary carbon credits to give customers scaled access to the VCM.

Latest Climate and ESG Announcements by Sponsors
  • Federal Hermes launches ‘Article 9’ Biodiversity Fund in affiliation with the Natural History Museum: The Fund meets critical demand for solutions delivering global goals on biodiversity and aims to achieve long-term capital appreciation by investing in a concentrated portfolio of companies that are helping to preserve and restore biodiversity.
  • Carlyle Establishes Diversity, Equity, and Inclusion (DEI) Leadership Network of Portfolio Company CEOs: Carlyle announced the creation of the Carlyle DEI Leadership Network, a coalition of the firm’s portfolio company CEOs around the globe to develop a peer group for shared resources, insights, and learnings to advance diversity, equity and inclusion within their respective companies.
  • Nuveen closes over $200 Million for its first private equity impact fund: The new fund seeks investments that will enable disruptive enterprises to decrease waste and use resources in a circular manner, boosting efficiency and lowering emissions, as well as investments that will increase access and lower the cost of products and services for underserved customers.
  • KKR closes $17 billion global infrastructure fund: The closing comes at a time of significant growth in demand for private infrastructure investment, particularly in sectors including digital communications, energy transition, transportation, water, waste, and industrial infrastructure, among others.
Government and Regulatory Updates

Check-out the following article for a full review of the key ESG Regulatory updates from March.

ESG Data, Articles & Market initiatives

GIIN launches beta version of first IRIS+ impact performance benchmark: The Global Impact Investing Network (GIIN) has released the beta version of its first benchmark, which will allow investors to analyse and evaluate the impact performance of their investments relative to peers and global targets.

ERM offers ESG Ratings Platform for Private Markets: ESG Fusion evaluates more than a dozen factors to provide a comprehensive assessment of a company’s ESG risks and opportunities.

Deconstructing ESG scores: How to invest with your own criteria (BIS Working Papers): The authors explore the feasibility and performance of more targeted investment strategies based on specific categories by deconstructing ESG scores into their granular components.

First beta version of the TNFD framework now out for market consultation: The first beta version of the Taskforce on Nature-related Financial Disclosures (TNFD) framework includes three core components: An outline of fundamental concepts and definitions for understanding nature, draft disclosure recommendation, and guidance to undertake nature-related risk and opportunity assessment.

Upcoming Webinars

Register for Solving the ESG data analytics conundrum (05 April 03:00 PM BST)

Post COP26, this webinar will explore the role of technology in developing a successful sustainable investment strategy. The webinar speakers are from Blackrock and Clarity AI.

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

*For any unfamiliar terms used within this article please refer to our Insights glossary

References

[1] https://www.gfma.org/correspondence/unlocking-the-potential-of-carbon-markets-to-achieve-global-net-zero/

[2] Ecosystem Marketplace; Refinitiv; McKinsey & Company

[3] https://group.bnpparibas/en/press-release/bnp-paribas-asset-management-launches-theam-quant-europe-climate-carbon-offset-plan-ucits-fund-established-french-law-carbon-offset-mechanism

[4] https://docfinder.bnpparibas-am.com/api/files/D96BA4F4-A725-4138-937B-C9331D493BA4

[5] Candriam Sustainable Equity Climate Action
https://www.candriam.co.uk/en/professional/download-file/T2wrbnpnc1VzMnpXZzBTcUo1RmpUdz09/KIID_LU1932634295_20220218_en_GB.pdf
https://www.candriam.co.uk/en/professional/fund-details/LU1932634295/

[6] https://www.hanetf.com/UsersFiles/HanETF/Documents/1285/HANzero-Carbon-Offsetting-Deck.pdf

[7] Aberdeen Standard Investments

[8] https://citibank.com/tts/sa/online-investments-money-market-funds/esg-publications/assets/docs/BlackRock-LEAF-Carbon-Offsetting-US.pdf

[9] https://www.blackrock.com/cash/literature/brochure/blackrock-wealth-liquid-environmentally-aware-fund.pdf

[10] https://www.cazenovecapital.com/uk/charities/our-funds/sutlc-crmaf-fund/

[11] https://www.esginvesting.co.uk/2020/10/cazenove-unveils-carbon-offsetting-scheme/

[12] https://library.cazenovecapital.com/view/868621286/?_ga=2.135210097.1922050668.1648650524-1532509174.1645724428

[13] https://www.heraldscotland.com/business_hq/19525464.new-50m-forestry-fund-will-help-catalyse-investment/

[14] https://www.propertyfundsworld.com/2021/06/07/301469/gresham-house-launches-new-uk-forestry-and-carbon-credits-strategy

[15] https://fsfc.foresightgroup.eu/

[16] https://www.nasdaq.com/articles/nasdaq-launches-worlds-first-index-family-focused-on-carbon-removal

[17] https://www.thebiodiversityconsultancy.com/our-work/what-we-do/for-companies/biodiversity-credits/

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