Green and Sustainable Finance

Debt Issuance from 2020: Themes for the year ahead

An increasing public awareness of climate change, coupled with the realisation that government action alone will be insufficient to tackle the climate crisis, has led to a growing focus on mobilising private finance to effect climate action. This has seen the green and sustainable bond market expand considerably over 2019, with continued growth predicted.

Below, we explore the global, pan-European and UK-domestic factors that we anticipate will have a significant impact on the green and sustainable bond market in 2020 and beyond.

Global Initiatives

Task-Force on Climate-related Disclosures (“TCFD”)

The TCFD was established to develop voluntary, industry-led recommendations aimed at companies with public debt or equity to incorporate climate-related disclosures into their financial filings, with the objective of ensuring that investors, lenders and insurance underwriters have the necessary information to assess how climate risk may affect their investments. The final TCFD Recommendations report was published in June 2017, proposing that companies’ climate-related disclosure focus on four core elements: governance, strategy, risk management and metrics and targets.

At the inaugural TCFD Summit in Tokyo in October 2019, Mark Carney noted that TCFD disclosures were steadily increasing in volume and sophistication, with 80% of the top 1100 global companies disclosing climate-related financial risks in line with some of the TCFD recommendations.

Pan European developments

EU Action Plan and Sustainable Finance Package

As part of its programme to fulfil commitments made pursuant to the Paris Agreement, the European Commission adopted a sustainable finance action plan in 2018 to put in place a strategy for a financial system that supports the EU’s climate and sustainable development agenda.

The first legislative measures under the action plan are contained in the EU Sustainable Finance Package, comprised of: (i) a regulation on carbon benchmarks to establish regulated categories of low-carbon indices to help investors compare the carbon footprint of their investments, which entered into force and became applicable 10 December 2019 (ii) a regulation to establish rules for regulated firms to incorporate environmental, social and corporate governance (“ESG”) considerations into their investment decision making and advisory processes and require additional disclosures for specific ESG products, which entered into force on 29 December 2019 and will generallyapply from 10 March 2021 and, critically, (iii) a taxonomy regulation establishing a framework to apply in determining whether a particular economic activity can be considered environmentally sustainable, which is expected to be published in early 2020. The taxonomy regulation underpins the remaining legislative measures and seeks to place ESG considerations at the heart of the financial system.

For more information, see our client note “New EU ESG rules for asset managers and financial advisers”.

National Initiatives in the United Kingdom

Climate-related disclosure developments

The FCA sought views of market participants on potential FCA action on climate change and green finance in 2018, publishing a Feedback Statement and outlining their proposed next steps in October 2019. Priority next steps include the publication of a Consultation Paper in early 2020 which will propose new disclosure rules for certain issuers aligned with the TCFD’s recommendations, on a ‘comply or explain’ basis, challenging firms where potential “greenwashing” is seen and clarifying expectations with respect to existing issuer disclosure requirements.

Separately, the UK government (through its Green Finance Strategy initiative) has set out its expectation that all listed companies and large asset owners will disclose in line with TCFD recommendations by 2022. The FCA acknowledges this in its Feedback Statement and confirms that its proposals align with the government’s expectations.

Looking forward, both the quantity and quality of climate-related disclosures should continue to increase as consideration of climate risk becomes embedded in financial decision making.

Recent developments in the bond market

In addition to the regulatory initiatives, recent innovations in the bond market include structuring techniques borrowed from bank financing. For example, last year, ENEL, the Italian energy company, issued the first European general purpose sustainable bonds which are linked to the UN’s Sustainable Development Goals. Interestingly, unlike typical green or sustainable bonds, the use of proceeds was not linked to sustainability – it was a general corporate purpose bond. The rate of interest depends upon ENEL’s progress towards achieving specified sustainable development goals, with a coupon step-up applicable to each of the three series if ENEL fails to meet these goals. This marked the first issuance of its kind in the European bond market, with a large syndicate of banks and Linklaters advising.

This may pave the way for more bond transactions introducing similar payment terms in the future.