Sustainable Finance

An increasing public awareness of climate change along with the realisation that government action alone will be insufficient to tackle the climate crisis has led to a growing focus around the world on mobilising private finance to effect climate action. This saw the green and sustainable finance market expand considerably during 2019, with industry bodies such as ISDA and AFME setting up specific working groups to focus on sustainable finance and the first legislative measures in the European Commission’s sustainable finance action plan being agreed and adopted.

However, significant financing is still required to meet the UN’s Sustainable Development Goals and there will therefore be increased pressure in 2020 for private capital to be used for sustainable investments. There remains a concern that there are not enough sustainable investment opportunities compared to the increasing demand, and as a result we are seeing a rise in sustainable derivatives and structured products, including “green” regulatory capital transactions and synthetic securitisations, repackagings of sustainable commodities such as carbon credits, repackagings of green and blue bonds and structured notes with payouts linked to green benchmarks and funds. We expect to see these types of products rise in popularity during 2020 as investors seek greater exposure to sustainable transactions.

To deal with the expected demand in sustainable finance products, we are also seeing increased regulation and industry led recommendations at a global, European and UK level intended to create a level playing field for these products, give companies and financial instruments easily comparable suitability credentials and clarify ESG disclosure requirements for investors and asset managers. The first legislative measures in the European Commission’s sustainable finance action plan have now entered into force, comprising two regulations, one establishing regulated categories of low carbon indices to help investors compare the carbon footprint of their investments and the other setting out ESG disclosure requirements for regulated firms. The much awaited taxonomy regulation establishing a framework to determine whether a particular economic activity can be considered environmentally sustainable is expected to be published in early 2020. For more information on the EU sustainable finance action plan, see our client note “New EU ESG rules for asset managers and financial advisers”.

It is expected that the quantity and quality of climate-related disclosures will continue to increase as consideration of climate risk becomes embedded in financial decision making. Even where the regulations comprising the EU action plan do not directly apply to financial institutions (for example, where they are arranging structured products), they will be subject to the usual obligation to be “fair, clear and not misleading” and the regulators will likely be looking at any sustainable products with increased scrutiny. Financial institutions should therefore pay particular attention to how they are marketing and disclosing risks for sustainable structured products.