ESG market dynamics: Many steps to transition

November 22 2019

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Many market participants want to move to the concept of "green issuers", firms that are recognised as having sustainability at the core of their DNA. Yet how do you get there? More robust ESG ratings (in bond final terms?), issuer-wide ESG analysis by investors or... a new generation of sustainability financial instruments?

Enel is helping push the latter. Its recent foray in the $ and € capital markets includes a "25bps sustainability coupon step-up", triggered if it fails to meet a predefined target - related to renewable energy connections and carbon intensity of their operations.

We've seen this technology in the Revolving Credit Facility (RCF) market – e.g. NWM has led over 20 sustainability performance RCF's in the past year and a half. Yet its novelty amongst drawn debt raised interesting questions.

Market participants on the potential advantages vis-a-vis a traditional green bond:

  • Can take into account a company-wide, holistic measurement (rather than just focus on [10]% of projects)
  • It's significantly less labour-intensive to draft - no framework required, simply several paragraphs in the prospectus
  • There is a clear debt pricing impact of pursuing a sustainability pricing impact
  • More accessible to firms without tangible assets / cash outflows with an obvious environmental / social benefit

Of course it is by no means the "holy grail". Concerns that have been raised:

  • How credible / ambitious is the measurement if calculated / proposed by the issuer themselves?
  • It offers the market only one KPI, rather than the 5+ you tend to get on a typical green / social bond
  • The issuer is not restricted from linking the funding raised to projects with a specific environmental benefit - so money could "go anywhere"
  • Not the same degree of governance / external verification that a green / social framework entails

Some of these areas could be resolved by diligent structuring. Below initial thoughts on the structural parameters to take into account when developing / investing in a sustainability performance instruments.


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