Sustainability in Private Finance: A year in review

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

Sustainable syndicated lending market

  • Overall, sustainable lending activity tailed off fairly sharply in 2022, on the back of rising inflation and global recessionary concerns. However, despite these headwinds, 2022 still concluded with overall volumes of USD 634 billion in sustainable lending (marginally lower than 2021 which recorded USD 687 billion of lending labelled as sustainable). See Figure 1.
  • It was also the first time since the onset of COVID (H1 ‘20) that sustainable syndicated loans contracted versus the previous half year period. Overall, there was USD 262 billion of sustainable lending in H2 2022, which was 30% below the peak half-yearly period observed in H1 2022 (USD 372 billion). See Figure 2.
  • Furthermore, we noted that the drop in sustainable lending volumes can only partially be explained by the contraction in overall lending in the market, as in addition to this, we saw a drop in % of sustainable lending in H2 2022 vs H1 2021 (11.4% vs 13.8%). A breakdown across the sectors (See Figure 3) shows that sustainable lending activity increased across the majority of sectors, most notably: Government; Auto/Truck; Forestry & Paper; and Aerospace. But, we did see large declines in Food & Beverage and Agribusiness.

Figure 1: Cumulative Global Sustainable Lending $Billion: 2021 Vs 2022

Source: Dealogic, 09/01/23

Figure 2: Half-Yearly Sustainable Lending, 2019 to 2022

Source: Dealogic, 09/01/23

Figure 3: (%) Sustainable Lending Across Key Sectors, 2021 Vs 2022

Source: Dealogic, 09/01/23

Infrastructure Debt

  • In line with broader sustainable lending activity, volume of infrastructure debt in 2022 (in Europe) saw a decline of 19.7% from 2021 highs. The biggest driver of lower infrastructure debt volumes was the Energy sector, which shrunk from USD 65 billion to USD 19 billion (decline of 71%).
  • ESG remains a prominent theme with continued appetite for debt financing of renewables projects as well as the continued growth of debt financing in the telecommunications sector (USD 52 billion and USD 51 billion respectively in 2022), the latter of which saw year-on-year growth of c.40%, with Germany and the UK being core drivers of this (see Figure 4).

Figure 4: European Infrastructure Debt $Billion, 2018 to 2022

Source: Infralogic, 09/01/23

Private Equity

  • Appetite for ESG-oriented investments within the alternatives space continues to grow, with 128 new private equity fund launches aligned with an ESG thesis in 2022 – a considerable increase of 41% on 2021 where there were 91 new fund launches (see Figure 5).
  • Furthermore, the growing appetite for ‘ESG-oriented’ funds has spread globally and is not just localised in Europe – the epicentre of ESG developments. In total, there were 50 new fund launches in Europe, whilst North America (46) and Asia (18) all saw a considerable number of new funds launched in 2022.
  • As a result of the growing appetite and demand to incorporate ESG factors into investment products, there has also been a subsequent increase in the prominence of ESG in the due diligence process for all Mergers and Acquisitions (M&A) activities as highlighted in a recent report published by KPMG in November 2022. The report indicates that investors are looking to significantly increase their use of ESG Due Diligence (DD), with 60% of respondents expecting to involve an ESG DD in deals. Moreover, 94% of investors declare that ESG considerations are now on their M&A agenda, and 73% said they would be willing to pay a premium for a target that demonstrates a high level of ESG maturity.
  • Despite all of the positive momentum from a sustainability perspective for private equity firms, the biggest challenge to date has been ‘how to utilise all funds raised’ – at the end of 2022, total dry powder stood at USD 2.5 Trillion (see Figure 6). Whilst the challenging market backdrop may act as a further drag, it equally may present itself as an opportunity in the form of distressed sales and the need for corporates to strategically prioritise business lines in 2023.

Figure 5: Alternative # Fund Launches with ESG Alignment

Source: Prequin, 09/01/23

Figure 6: Private Equity Dry Powder, Last 20 Years $Billion

Source: Dealogic, 09/01/23

Climate and ESG announcements by sponsors (as at 18 January 2023)

Goldman Sachs raises $1.6 billion private capital for climate fund

The total at final close exceeded its initial $1 billion target by almost two thirds, following its launch in 2021 and an earlier close for which it raised c$1 billion.

The Horizon Environment and Climate Solutions fund will invest globally across five themes: Clean Energy; Sustainable Transportation; Waste and Materials; Sustainable Food and Agriculture; and Ecosystem Services.

The fund was categorised as Article 9 under the EU’s Sustainable Finance Disclosure Regulation.

Trium Capital launches climate ‘impact’ hedge fund

Trium Capital has launched its first Article 9-compliant hedge fund, in a bid to capitalise on investor appetite for ESG strategies with low correlation to traditional asset classes. It will target 6-8% volatility with an expected net annual return of cash 6% to 8%.

The fund’s long exposure will consist of around 50 stocks focussed on environmental solutions, alternative energy infrastructure, waste management, water access and clean technology sectors. The strategy’s short exposure aims to hedge market and factor risk of the long positions

NextEnergy Capital launches NextPower V ESG

NextEnergy Capital (NEC), a global solar specialist in the renewables sector, announced the launch of its follow-on private OECD international solar strategy, NextPower V ESG (NPV ESG). NPV ESG is targeting capital commitments of $1.5 billion with a $2 billion ceiling.

NPV ESG is a 10-year closed ended vehicle that qualifies as an Article 9 Fund, under the EU Sustainable Finance Disclosure Regulation (SFDR). The Fund will primarily invest in OECD solar assets and adjacent technologies, such as energy storage; focusing on geographies in which NEC has already built an investment track record, an operating presence and expertise.

TPG launches ‘TPG Next’ Fund to invest in underrepresented Alternative Asset Managers with a $500m commitment from CalPERS

The launch of the ‘TPG Next’ fund marks an expansion of TPG’s impact investing platform, which also includes the ‘Rise Fund’. The fund invests in companies driving measurable social and environmental impact, along with its climate solutions-focused fund TPG Rise Climate.

TPG Rise Climate recently announced its final close, raising more than $7 billion from institutional investors and global corporations. The new fund aims to increase the number of diverse-led firms in alternative assets. CalPERS (California Public Employees’ Retirement System) will anchor the fund with a $500m commitment.

ABP sets target to invest €30bn in energy transition

Dutch pension fund ABP has set a target to invest €30 billion in the climate transition*, as it bids to reduce its carbon footprint across its entire global investment portfolio by 50% by 2030, compared to 2019 levels.

ABP said it will concentrate investments in climate mitigation and adaptation and renewables – such as solar and wind, smart networks, sustainable options for insulation, (green) hydrogen, clean mobility and energy storage.

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M&G backs launch of sustainable food-focused impact investment fund

M&G announced its £200 million investment in two new investment strategies which target global food challenges being launched by its recently acquired impact investment business responsAbility.

The strategies, based in Asia and Latin America, are aimed at improving the production and availability of healthy food worldwide, as well as rural livelihoods. They also aim to build resilience to climate change in the agricultural value chain.

Zurich-based responsAbility invests in private debt and private equity across emerging markets, focusing on companies in the financial inclusion, sustainable food and climate finance sectors.

£9.2bn flagship BlackRock pension strategy adopts climate target

BlackRock announced that its flagship £9.2 billion* default pension strategy in the UK has adopted a formal ESG-focused investment policy, including a specific emissions target.

Among the aims, the strategy will now target halving carbon emissions intensity of sales by July 2029 – compared to July 2019 levels – and achieving a lower portfolio emission intensity than an unspecified “non-ESG benchmark”.

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Manulife launches Forest Climate Fund to raise $500 million

Manulife Investment Management launched its Forest Climate Fund (FCF) which aims to raise $500 million to buy sustainably managed forests that sequester carbon. Manulife has also sold a total of 6.1 million carbon credits. Manulife´s US forests represent over 95% of improved forest management carbon credits issued and retired to date. Manulife is the latest financier to use forest carbon credits in its climate strategy.

In June 2021, J.P. Morgan Asset Management also bought timberland manager Campbell Global LLC; clearly eyeing the carbon markets.

HSBC-backed natural capital funds raise $650 million

HSBC Asset Management, and climate change investment and advisory firm Pollination’s joint venture ‘Climate Asset Management’, announced today that it has reached commitments of more than $650 million for its natural capital investment funds

Climate Asset Management was launched in 2020 by HSBC Asset Management and Pollination to invest in a diverse range of projects that will preserve, protect and enhance nature over the long-term. It also looked to offer investors a wide exposure to global natural capital themes in both emerging and developed markets, while also providing stewardship and evaluation of the investments; enabling investors to quantitatively measure impact.

Franklin Templeton launches ClearBridge Sustainable Infrastructure ETF

The new Exchange-Traded Fund (ETF) will seek to invest in income-generating infrastructure assets with strong ESG attributes and stable cash flows. The fund may invest in the physical assets necessary for communities and economies to function and grow, including transportation, electricity, energy infrastructure, water, sewage, communications and renewables.

ESG data, articles and market initiatives

COP15 agreement ‘significant,’ but credit impact depends on implementation

  • Moody’s Investors Service said the UN COP15 biodiversity summit agreement is a “significant milestone” considering the extent of natural capital risk in debt markets, but the credit impact of the deal depends on how the agreement is implemented by jurisdictions.
  • The COP15 summit concluded with an agreement aiming to halt and reverse natural capital loss globally – including an agreement to protect 30% of land and sea by 2030 and providing $200 billion a year in biodiversity-related funding.

Pension funds could lose €255bn in disorderly transition, first climate stress test reveals

  • European pension funds could lose up to €255 billion ($272 billion) of assets in a sudden, ‘disorderly’ transition to a net zero economy because of their exposure to carbon intensive industries, the first climate stress test of the sector has revealed.
  • The European Insurance and Occupational Pensions Authority (EIOPA) analysis found the 187 pension funds across 18 countries, with a combined €2 trillion in assets, have “material exposure to transition risks”.
  • The scenario modelled a disorderly transition because of delayed implementation of policy measures, which resulted in a sharp rise in carbon prices.

AFME: European green securitisation, regulatory state of play, obstacles to growth and opportunities for leadership report

  • The report, published by the Association for Financial Markets in Europe (AFME) sets out a comprehensive overview of the European regulatory landscape for green securitisation, highlighting the challenges preventing it from fully contributing to Europe’s green transition, as well as the full scale of its potential growth by 2030.

Private market ESG solutions ‘growing at 42% per year’

  • ESG solutions for private markets is a “small but growing area” that stands to benefit from growing demand for data and information services, according to consultancy Opimas.
  • A report seen by Environmental Finance estimates that spending on ESG solutions for private markets sat at roughly $45 million in 2022, or “a small fraction of the $1.3 billion global ESG data market.”
  • Opimas identified 15 vendors offering an ESG solution for private markets. They were categorised as either tools for investors to self-collect information, databases of information, or services to produce portfolio level ESG reports.

BlueMark launches impact verification framework to fill ‘critical’ data gap

  • BlueMark has published an external verification framework* to assess the completeness and reliability of fund managers’ impact reports.
  • The framework could “fill a critical gap” in the impact investing market, by clarifying the types of information that impact reports should include, as well as include “specific steps” to improve transparency and credibility in the field.
  • In an analysis of seven investors that aim to make positive social and environmental impact as well as financial returns, BlueMark’s assessment of “data clarity” assigned the most ‘Low’ and ‘Moderate’ ratings, in comparison to reporting disclosures around impact strategy, impact results and data quality.

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The London Stock Exchange (LSE) issued its first Voluntary Carbon Market (VCM) designation to Foresight Sustainable Forestry Company (FSF)

  • The LSE is the first exchange to use a public carbon market framework to drive funding into climate mitigation projects.
  • The LSE launched its VCM to give investors easier access to information about carbon credits they seek to buy.
  • The LSE VCM platform gives entities and individuals a means to raise funds and use the money on projects that cut emissions. In return for their investments, investors and firms can get carbon credits in place of cash dividends.
  • FSF -an investment company offering direct and liquid access to UK forestry and afforestation projects - will offer access for investors and companies wanting to buy carbon credits to offset emissions.

Define greenwashing before trying to punish it, EFAMA tells regulator

  • The European Fund and Asset Management Association (EFAMA) told EU regulators until there is a satisfactory definition of what constitutes greenwashing, action to curb the practice needs to be “proportionate” to the currently limited understanding.
  • EFAMA suggested that greenwashing within the financial sector should be understood as actions which knowingly misrepresent the sustainability practices of a product, with the intention to mislead.
  • This is fundamentally different to unintentional mistakes, changes in data availability or the enhancement of calculation methodologies, it said. EFAMA argued however that greenwashing may still occur without the intention to mislead if investors are ‘grossly negligent’ by not putting enough processes in place to ensure the sustainability claims are followed through.

Fund managers brace for ESG correction with $4 trillion at stake

  • A plan by Europe’s markets watchdog, European Securities and Markets Authority (ESMA), to set quantifiable ESG and sustainable investing standards is forcing portfolio managers to rethink how they design and market an ESG fund class known as Article 8.
  • Morningstar Inc. estimates that only 18% of Article 8 funds, which hold about $4 trillion of assets, currently meet the watchdog’s proposed threshold for sustainable investments.
  • ESMA is now proposing that a fund with ESG-related words in its name have at least 80% of its holdings in investments that actually meet the strategy description.

S&P acquires Shades of Green from CICERO

SDI AOP launches patent tracker as impact assessment tool

  • The Sustainable Development Investments Asset Owner Platform (SDI AOP) and Qontigo have released a forward-looking dataset to assess companies’ patent portfolios.
  • The SDI Innovation Outlook provides reports on patent portfolios on 2,000 firms, on their alignment to the United Nations’ Sustainable Development Goals (SDGs).
  • Evaluating a company’s patent activity – or use of intellectual property – can indicate how a company is progressing in its sustainability journey. For example, if an energy company claims it is investing in clean energy, its patent activity may contradict or support this claim.

Eiopa to explore lower risk charges for insurers supporting climate adaptation

  • The European Insurance and Occupational Pensions Authority (Eiopa) is to investigate whether insurers that encourage climate-related adaptation measures through their underwriting should benefit from lower capital charges*.
  • Eiopa outlined its intended scope, methodologies and data sources for three distinct areas of analysis: assets and transition risk exposures; underwriting risk and climate change adaptation; and social risks and objectives.

*Subscription may be required to view link.

Upcoming webinars and events

2023 ESG and Sustainable Finance Outlook Amer/EMEA Edition. Moody’s Investors Service (January 31st 3:00pm GMT; Virtual Event):

Join Moody’s for a live panel discussion where Moody’s specialists will discuss key ESG trends to watch in 2023 and their credit implications, as well as critical factors shaping global sustainable debt markets.

Topics Include:

  • How will growing focus on the implementation of decarbonisation plans amid higher execution risks for green investments impact corporate credit?
  • Which sectors will be most affected by ongoing cost of living concerns?
  • What will be the key drivers of sustainable bond volumes against the backdrop of a challenging macro environment?

Additional details of the panel discussion and a link to register

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

  • Rahel Haque, Vice President, Climate and ESG Capital Markets
  • Tom Cascales, Associate, Climate and ESG Capital Markets
  • Vishal Saxena, CFA, Associate, Climate and ESG Capital Markets
  • Fazl Ahmad, Analyst, Private Finance Structuring and ESG

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

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