ESG market embraces benefits of Private Placements

January 23 2020

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Robert BusbyManaging Director, Head of Private Placements

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5 minute read

The green Private Placements segment is steadily evolving and playing an important role in the carbon transition across the debt capital markets

The budding ESG market is very much a public markets phenomenon: Until now, Private Placements (PP) make up only around 9% of all sustainability-labelled debt, the vast majority of which has been issued in the MTN market (source: Dealogic).

However, this is rapidly changing. The green PP segment is steadily evolving and playing an important role in the carbon transition across the debt capital markets, not only for smaller firms which can’t access the public bonds markets due to their size, but also for large corporates which see the PP market as a cleaner alternative for green debt issuance.

There are a number of developments which will help boost green debt issuance over the new decade:

Clearer guidance and better data whet appetite for broadening range of green debt

Clearer standards for green capital market products have shown to be an important catalyst. Industry and government led initiatives - such as International Capital Market Association or the EU Green bond standards - are helping to clarify what it takes to get a “green badge” for the various financing instruments. At the same time, tech and data firms are improving the quality and access to environmental impact metrics.

As a result, companies of any size have clearer guidance on how to become a green issuer, and at the same time they have better data available to showcase their green credentials. All of this helps to reduce costs, broadening the range of potential debt issuances for which it is economical to establish a set of green commitments. As a consequence this also draws more prospective issuers to the PP market.

PPs come with a vetting process equally liked by ESG investors and issuers

ESG investors are facing growing client demands for sustainability-linked issuances, but have difficulties finding suitable investment opportunities in the public markets, where only 1% of outstanding debt has a sustainability label (source: Dealogic). Moreover, it is not always clear where this money ends up, with most public deals financing a broad portfolio of projects, not only green projects. This is where investments into PP come into play: they can be an additive source of sustainability-linked assets and often have a more direct link to a particular green project in the use of proceeds. Through the due diligence and credit review process the PP investor base can properly assess the sustainability-link of a prospective issuance.

Meanwhile, green issuers appreciate the fact that advisory costs for PPs are significantly lower and the whole process can often be completed much more quickly compared to green bonds in the public sphere.

PP investors minimise risks via ESG focus

Risk management has a particular bearing on the PP market. Climate change and transition risks could have a meaningful impact on an issuer’s credit profile, which can make PP riskier given the illiquid nature of the instrument.

Therefore ESG considerations are likely to increasingly form a core part of PP investors’ decision making, regardless of whether the issuer has specific green plans.

It is safe to say the PP market will be an attractive avenue for future green issuance for issuers and investors alike!


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