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                                                            WINTER 2020

     Are banks
   really going
  green, or just
greenwashing?

The key themes   The big debate:    The case for        Market Rankings
of 2021          transition bonds   natural capital     winners revealed
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
Corporate &
            Investment Banking

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BBVA’s expertise in sustainable finance is
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as sustainable bonds and loans, as
well as many short term financing
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BBVA is your ideal partner if
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Follow us on Linkedin:
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Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
Contents

4     News                                                      12 Green bonds
Sustainability-linked bonds                                     Green bonds begin to flow
are ‘more powerful than                                         from emerging market banks
green bonds’                                                    A pioneering initiative by the IFC to encourage green bond
                                                                issuance by banks in emerging markets is bearing fruit,
                                                                reports Graham Cooper
5     News
S&P’s ESG capabilities
boosted by $44bn IHS Markit                                      14       The big debate

merger

    6       Themes to watch

                                                                 Transition bonds: Is a transition
                                                                 bond label still needed, now that
 Looking                                                         the Sustainability-Linked Bond
                                                                 Principles have been published?
 ahead to 2021                                                   Yes, argues                    No, argues
                                                                 Marisa Drew                    Jacob Michaelsen
 Peter Cripps assesses some of the key trends in
 sustainable finance to look out for over the next year          of Credit Suisse               of Nordea

                                                                16 Impact
10 Fixed income
ESG ratings in fixed income:                                    Impact is part of pension
A good start                                                    trustees’ fiduciary duty,
                                                                says coal pensions CIO
ESG ratings should only be used as a first step when it comes
to assessing issuers, a panel at Environmental Finance’s        Managing a pensions investment portfolio in line with
ESG and Fixed Income 2020 conference heard.                     environmental and social impact considerations can be part
Ahren Lester reports                                            of trustees’ fiduciary duty, Michael Hurley reports

Environmental Finance | Winter 2020                                                                                          1
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
Contents

    18         Cover story                                                     28
    Are banks
    really going
    green, or just
    greenwashing?
    Some of the world’s largest banks
    have made hundreds of billions
    of dollars in commitments to
    sustainable financing, with
    many pledging to align their                                                     Environmental markets
    portfolios with the goals of the
    Paris Agreement. Christopher                                                    buoyant despite pandemic
    Marchant asks whether these
    commitments are impactful

                                                                                30 GHG markets

    24         Natural capital                                                  38 Weather risk

                                                                                40 Renewable Energy Certificates

                                                                                45 Catastrophe risk

    ‘The time is right to                                                     46 People moves
    invest in natural capital’                                                48 Infographic
    How does HSBC Pollination Climate Asset Management
    aim to attract large-scale investment in natural capital,                 2020: the year the social bond came of age
    Michael Hurley asks

    Editor Peter Cripps                   SUBSCRIPTIONS                       Environmental Finance                   or otherwise, without the written
    Consulting Editor Graham Cooper       Business Development Manager        (ISSN 1468-8573) is published           permission of the publisher.
    Assistant Editor Michael Hurley       Borte Mehmetcik                     quarterly by Field Gibson Media Ltd.
    Content Strategist Annabelle Palmer   T: +44 (0)20 3651 7203                                                      Environmental Finance does not accept
    Senior Staff Writer Ahren Lester      F: +44 (0)20 3651 7205              Registered office:                      responsibility for views and details
    Staff Writer Christopher Marchant     E: info@environmental-finance.com   Pentagon House,                         expressed in advertisements and
    Data Researcher Ashton Rowntree                                           52-54 Southwark Street,                 corporate statements. These are made
                                          Managing Director Tony Gibson       London SE1 1UN.                         by the advertiser and are not checked
    Art Direction Sargeant Design Ltd     Chairman Peter Field                                                        by Environmental Finance.
                                                                              © Field Gibson Media Ltd, 2020.
    Business Development Manager          Environmental Finance               All rights reserved. No part of this
    Neil Porteous                         Pentagon House, 52-54 Southwark     publication may be reproduced,
    Marketing Director Tracey Huggett     Street, London SE1 1UN              stored in or introduced into any
    Events Marketing Manager              T: +44 (0)20 3651 7203              retrieval system, or transmitted, in
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                                          E: info@environmental-finance.com   mechanical, photocopying, recording

2                                                                                                                        Environmental Finance | Winter 2020
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
HSBC

Taking the long view on climate data
HSBC’s analysts have been collecting climate data since 2007. Piers Butler and Ashim
Paun explain the bank’s approach, how the data is used – and what comes next
Environmental Finance: HSBC’s Climate                                                                            wide decarbonisation has grown and evolved. One
Solutions Database is one of the longest                                                                         we’re watching particularly closely is the rise of
running corporate climate datasets in the                                                                        the hydrogen economy: we see an ecosystem of
market. Can you explain its genesis?                                                                             clean hydrogen production emerging to meet
Piers Butler, head of Global Research                                                                            demand from across the economy, including from
Direct: The bank has long recognised the threat                                                                  transport, heavy industry as well as domestic heat.
posed by climate change and the responsibility of
the finance sector to play its part in addressing it.                                                            EF: What plans do you have to develop
We established the Climate Change Centre of                                                                      HSBC’s sustainability-related data offering?
Excellence in 2007 and, in the same year, HSBC                                                                   AP: Our ESG Database, a new proprietary
Global Research launched the HSBC Climate                                                                        offering, includes 10 key environmental, social and
Solutions Database.                                                                                              governance metrics for companies under HSBC
   We screen listed companies of all market caps                                                                 coverage. This includes around 1,900 companies
across all global markets for climate revenue                                                                    globally, with half in Asia Pacific. Data collection
exposure. The database is run jointly by the ESG           Piers Butler                Ashim Paun
                                                                                                                 is based on publicly available information and
and Equity Strategy teams, and it involves a year-                                                               undergoes a rigorous normalisation process. The
round process of manual gathering of relevant           EU Taxonomy – how aligned are the two                    database has a three-year history, from 2016-18.
climate data.                                           approaches?                                                 The 10 key metrics were selected to give a
                                                        AP: Almost all the climate themes and technologies       broad indication of the status of ESG information
EF: What is unique about the database, and              in our framework are covered in the EU Taxonomy,         disclosure at companies covered by HSBC Global
how is it used by your clients?                         including solar, wind, geothermal, marine, hydro,        Research. Using this disclosure as a starting point,
Ashim Paun, global co-head, ESG                         bioenergy, building efficiency and transport             our equity analysts look in more detail at sector-
Research: The database offers a toolkit that            efficiency. The six environmental objectives of the      specific ESG issues and work towards integrating
enables identification of climate change-themed         EU Taxonomy – climate mitigation, adaptation,            ESG into their financial analysis.
investment opportunities. Its long history of           sustainable water use, transition to a circular             Our Fragile Planet series of notes and
curated data shows how themes, corporate activity       economy, pollution prevention and ecosystem              underlying framework of metrics is an additional
in climate technologies, and country- and regional-     protection – are all also covered, to a considerable     proprietary offering. It explores climate change
level cleantech industries have developed over time.    extent, by our framework.                                vulnerability and resilience across 67 developed,
   Our taxonomy is detailed. The database                  However, the two approaches are somewhat              emerging and frontier markets. In our most recent
currently includes 21 climate themes, which are         different, with the EU Taxonomy also addressing          cut, we use 54 datapoints which explore transition
further divided into more than 80 sub-themes            negative ESG impacts, which our Climate                  risks associated with fossil fuel use and economic
and over 100 product categories. From a starting        Solutions database does not currently do. However,       dependence, cleantech and industrial innovation
universe of around 14,000 companies, just over          we continually enhance our process, methodology          potential, physical climate risks and aspects of
3,000 are currently found to have some climate          and framework, and this is something we are              climate governance.
revenue and enter the database for a detailed           examining.                                                  Our clients can then look at where they have
analysis.                                                                                                        asset exposure across corporate equity and debt,
   The raw data can help signed-up clients to           EF: Presumably such a broad and long-                    sovereign debt and real assets, to identify either
identify opportunities, integrate climate change        running dataset generates some useful                    positive drivers or negative risks around specific
into investment management processes and                insights into how the climate theme is evolving          metrics.
determine the climate exposure of their portfolios.     – what signals is it sending?                               We publish reports each year in which we update
   We publish related research notes. These             PB: We’ve seen a substantial increase in the             the methodology and provide the underlying data
may include analysis of market trends in climate        number of companies which our database picks up          to clients. In the most recent, Finland was best
themes – i.e. those which look fundamentally more       as generating climate-related revenues – up around       placed overall, given a relatively good score on
attractive than others. We also publish baskets of      four-fold since 2008. There have been particularly       physical risks and very low air pollution, strong
companies which give revenue exposure to policy         sharp rises in companies from emerging regions –         institutional quality to govern environmental risks
changes, country and regional markets, or to            LatAm, MENA and Asia.                                    and high levels of innovation in climate-relevant
trends, such as the clean transport transition and         The total amount of climate revenues generated        sectors.
climate-smart cities.                                   by companies globally has also been increasing, up
                                                        by one sixth in the last five years of data.We’ve also   For more information, please email:
EF: Its focus on climate-linked revenues                seen a growing number of themes and products as          askresearch@hsbc.com
is similar to the approach taken by the                 the industrial response to demand for economy-
Environmental Finance | Winter 2020                                                                                                                               13
                                                                                                                                                                   3
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
Labelled bonds

Sustainability-linked bonds are
‘more powerful than green bonds’

T
              he ‘use of proceeds’ model
              adopted by most green bonds
              came under attack, at a panel at
              Environmental Finance’s ESG in
              Fixed Income Europe 2020 virtual
conference, amid allegations that it is
susceptible to ‘greenwashing’.
    Speaking at the panel ‘Is the use of
proceeds model fit for purpose’, Jakob
Thomae, managing director for Germany
at the 2 Degrees Investing Initiative
(2DII), described investing in controversial
corporates through green bonds, as being “a
                                                    Jakob Thomae, 2DII                Johanna Koeb, Zurich            Ben Caldecott, Oxford
little bit like having a cousin who is going to                                    Insruance                        University
school and also taking drugs.
    “So, I tell myself I’m just going to give        This year the International Capital Market    that they would like to get some impact.
him pocket money for school books [the            Association (ICMA), which administers            And that’s where the green bond or the use
green bond]. And, meanwhile, the other            the Green Bond Principles, introduced            of proceeds bond has been transparent, for
money he makes he’s spending on his drug          principles for sustainability-linked bonds,      showing the impact on where the investor’s
habit, but I can be happy because I’m just        while guidelines on transition bonds were        money is going, and that’s why I still think
giving him the book money.”                       released in December.                            there is room for the use of proceeds
    The debate over the use of proceeds              Ben Caldecott, director of Oxford             [model].”
model comes as a range of new sustainability      University’s Sustainable Finance                    Eusebio Garre, head of funding at IDB
labels have been introduced in the sector         Programme, said: “Sustainability-linked          Invest, said: “Both models have their own
in recent years, including transition bonds,      bonds, and indeed sustainability-linked          merits, both for issuers and for investors.
which adopt the use of proceeds model, and        loans, are a really significant development      The KPI-linked model innovates by
sustainability-linked bonds, which do not.        for the future of sustainable finance, and are   appealing to issuers because it does provide
    Responding to Thomae’s comments,              much more powerful and important than            them with full flexibility on the use of
Johanna Koeb, head of responsible                 most of the green ‘use of proceeds’ stuff out    proceeds, as long as they can commit in a
investment at Zurich Insurance Company,           there in the market.                             transparent and consistent way to improve
said: “I do disagree with the examples               “The reason for that is very simple, which    very specific KPIs.
he made about green bonds because it’s            is that it creates a clear economic incentive       “However, I think the jury’s still out
somewhat makes them sound like they’re all        for issuers to change their behaviour. The       about how many issuers are going to be able
useless, and they’re all greenwashing and it’s    magic happens when a key performance             to deliver such a consistent and credible
connected to companies as if taking drugs.        indicator (KPI) is found that both reduces       message.”
So that kind of language, I know is nice and      credit risk, but also improves environmental        The EU’s forthcoming green bond
provocative, but I think it does injustice to     and social outcomes.”                            standard also came under fire. Thomae
the market.                                          He advocated that the market should           said it was possible that under the standard
    “The idea of integrity is not necessarily     pivot away from green bonds and towards          a corporate could issue a ‘use of proceeds’
tied to the instrument. Both the ‘use of          sustainability-linked bonds.                     bond while the overall carbon output of
proceed’ and the sustainability-linked               But Jens Hellerup, senior director, head      the business rises. He described this as “an
models are focused around transparency            of funding and investor relations at Nordic      unfortunate choice”.
and integrity, and I think both come in more      Investment Bank, the largest issuer of green
ambitious and in less ambitious forms. It’s       bonds in the region, defended the ‘use of          The panel discussion was moderated by
the duty of investors to make up their minds      proceeds’ model: “When we have been              Tanguy Claquin, head of sustainable banking,
                                                                                                   Crédit Agricole CIB
[about the credibility of the issue].”            speaking with investors, they have been vocal
4                                                                                                                Environmental Finance | Winter 2020
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
M&A

S&P’s ESG capabilities boosted by
$44bn IHS Markit merger

F
            inancial services giant S&P
                                                   COMPREHENSIVE SOLUTIONS                                         S&P GLOBAL         IHS MARKIT
            has agreed to merge with
            data provider IHS Markit, in                               ESG scores with time series data                   ✔
                                                   DATA &
            a mega deal that will boost                                Workflow and reporting platforms                                    ✔
                                                   PLATFORMS
            S&P’s already-considerable                                 Emissions database                                                  ✔
environmental, social and governance                                   ESG equity indices                                 ✔
(ESG) firepower.                                                       ESG fixed income indices                                            ✔
   The all-stock merger values IHS Markit          BENCHMARKS
                                                                       ESG evaluations                                    ✔
at $44 billion, including $4.8 billion of
net debt. Upon completion, current S&P                                 Price benchmarks (carbon, hydrogen)                ✔
Global shareholders will own approximately                             Climate and transition scenarios                   ✔
67.75% of the combined company,                    ANALYTICS           Plastics circularity                                                ✔
while IHS Markit shareholders will own                                 Asset valuations                                                    ✔
approximately 32.25%.
   Both companies have been steadily
                                                  Company offerings (Source: S&P Global)
increasing the ESG-related products and
services they offer, so the move will have      consists of credit ratings, financial markets          The scores are powered by the SAM
ramifications for the rapidly consolidating     data, Platts energy data and indices. It also       Corporate Sustainability Assessment (CSA),
and expanding ESG data market.                  provides ESG services such as its Global            an annual engagement capturing around
   Assets that will become part of S&P’s        ESG Scores and green bond assessments,              1,000 data points per company. A media
operations include IHS Markit’s ESG             the S&P Global Ratings Green Evaluation.            and stakeholder analysis further captures a
Reporting Repository, an online platform          Currently S&P’s Global ESG Scores                 company’s involvement and management
for the collection, storage and dissemination   assess the industry-specific ESG factors            of ongoing ESG issues or crisis situations.
of corporate ESG data and reports.              expected to have an impact on a company’s           S&P bought SAM’s ESG research capability
   IHS Markit earlier this year launched        growth, profitability, capital efficiency           from Robeco earlier this year, the latest in a
country-level data for more than 200            and risk exposure. The scores contain               series of ESG-related acquisitions.
countries with a 10+ year observation           coverage of 7,300 companies, representing              In 2016, S&P Dow Jones Indices (DJI)
period for 40 key sovereign risk factors. In    approximately 95% of global market                  acquired environmental data provider
2019, it developed a service to provide ESG     capitalisation.                                     Trucost.               Christopher Marchant
information specifically for private equity
firms, their investors and their portfolio
companies.                                       Deutsche Börse buys majority stake in ISS
   In the same year, IHS Markit launched         German financial exchange operator Deutsche Börse has acquired a majority stake in
                                                 Institutional Shareholder Services (ISS), valuing the corporate governance and environmental,
a Global Carbon Index which tracks the           social and governance (ESG) data provider at over $2.2 billion.
performance of the largest and most liquid           The Frankfurt Stock Exchange operator said the partnership of its Qontigo arm – which
carbon markets – the European Union’s            combines its STOXX and DAX index business with its Axioma analytics unit – with the
Emissions Trading System, the California         capabilities at ISS will provide additional ESG opportunities for growth in the fast-growing
                                                 sector. In particular, the deal will allow Deutsche Börse to provide stiffer competition for MSCI
Cap-and-Trade Programme, and the
                                                 and other providers of ESG indexes. Ironically, MSCI preciously owned ISS.
Regional Greenhouse Gas Initiative on the            Deutsche Börse chief executive Theodor Weimer said: “Together, ISS and Deutsche Börse
east coast of the US.                            have complementary ingredients to become one of the globally leading ESG players of the
   IHS Markit is also a registry provider        future.”
for the voluntary carbon markets, a role for         ISS has been one of the most acquisitive players in the ESG data market. In February 2019,
                                                 it bought CAER, a provider of ESG research on Australasian companies. Two and a half years
which it has regularly been recognised in        ago, ISS bolstered its ESG offering through the acquisition of German ESG data provider and
Environmental Finance’s Voluntary Carbon         second opinion provider Oekom. The deal came just months after ISS bought the investment
Market Rankings.                                 climate data division of South Pole Group. In 2015, it acquired green advisory firm Ethix,
   Meanwhile, S&P’s sprawling business           expanding its environmental services.                                                   Ahren Lester

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Themes to watch

Looking ahead to

Peter Cripps assesses some of the key trends in
sustainable finance to look out for over the next year

1. COP26                                            2. Race to net-zero carbon
Whether it turns out to be a success or a           A Race to Zero Campaign was launched in
failure, one of the key moments of 2021 will        June by the UNFCCC, as pressure mounts
be COP26, in Glasgow in November.                   to take action ahead of the COP.
   The landmark Paris Agreement, at                    There have already been numerous
COP21 in 2015, allowed countries to set             net-zero commitments in recent weeks,
their own targets. But as part of the deal,         including:
countries were expected to ratchet up their         • The UK in December raised its 2030
commitments every five years.                          target to 68% compared to 1990 levels, up
   That was supposed to happen in 2020 at              from 53% previously, to help it meet its        “More pension funds
COP26, but it was delayed a year because               2050 net zero target. It claims this would
of the coronavirus. Now there is even more             be the fastest rate of decarbonisation of        and asset managers
urgency surrounding the event.
   Being held in the UK, it is hoped that this
                                                       any major economy.
                                                    • Japan in October said it will cut emissions
                                                                                                         will make net zero
COP will have a particularly strong focus              to net zero by 2050, up from its previous     commitments for 2050,
on finance, led by former Bank of England              target of 80% by the same date.
governor Mark Carney, who has been                  • South Korea in October also pledged a           with near-term targets.
appointed the Prime Minister’s Finance                 2050 net zero target.
Adviser for COP26. Climate finance and              • China, the world’s biggest GHG emitter,           The Net Zero Asset
the role of financial institutions and central
banks will therefore be under the spotlight.
                                                       in September said it would hit net zero          Owner Alliance will
                                                       before 2060. This was its first net zero
   Another key aspect to watch will be how             target.                                        dominate, as the most
Article 6 is progressed. It should clear up         Paris-based policy research institute IDDRI
the role of carbon markets in the agreement,        argues that net-zero targets are the legacy of   serious and influential of
including the extent to which countries are         COP21.                                             these commitments”
allowed to use offsets to help hit their targets.      Its recent paper on climate neutrality
   Also, look out for developments on the           points out: “As of November 2020, more            Fiona Reynolds, Principles for
Just Transition (see below).                        than 110 countries have committed to a               Responsible Investment
                                                    net-zero objective. These represent in total
6                                                                                                             Environmental Finance | Winter 2020
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
around half of the world’s GDP and global            Will the change in attitude towards
                                      CO2 emissions, and include notably the            climate also boost the uptake of ESG in the
                                      totality of the G7 and a majority of the G20.     country?
                                         “Carbon neutrality has also become a
                                      reference for a growing number of non-            4. Central banks step up their
                                      state actors (NSAs). For example, 1,100
                                      companies have adopted carbon neutrality
                                                                                        focus on sustainability
                                      goals and joined the UK COP26’s Race to           Central banks have in recent years become
                                      Zero Campaign alongside other NSAs.               key players in sustainable finance.
                                         “It is stunning to see how fast this concept      The Central Banks and Supervisors
                                      of carbon neutrality, barely discussed            Network for Greening the Financial System
                                      beyond experts before 2015, is now                (NGFS) now has members accounting for
                                      mainstreamed and widely understood by             more than 60% of global emissions.
                                      leaders and society.”                                In an interesting development, it has been
                                         Investors are not immune from this trend.      widely reported that the US Federal Reserve
                                      The Net Zero Asset Owners Alliance is             has applied to join the NGFS.
                                      already gaining traction, with 33 signatories        While it now seems that many central
                                      representing $5 trillion of assets, which         banks accept that climate change is a
                                      have committed to reduce their portfolio          legitimate part of their remit on financial
                                      emissions to net zero by 2050.                    stability/systemic grounds – this was not the
                                         Fiona Reynolds, CEO of the Principles          case five years ago – it remains to be seen
                                      for Responsible Investment, predicts: “More       how far they will go in promoting this cause.
                                      pension funds and asset managers will make           Eurozone banks will, in 2022, be stress-
                                      net zero commitments for 2050, with near-         tested on their ability to withstand climate-
                                      term targets.                                     related risks, the European Central Bank has
                                         “The Net Zero Asset Owner Alliance will        said.
                                      dominate, as the most serious and influential        In the UK, the PRA is starting to stress
                                      of these commitments. Pension funds               test banks and insurers, while the FCA is
                                      will realise that engagement alone will not       making TCFD reporting mandatory.
                                      get them to net zero – they need to move             The NGFS has devised scenarios that
                                      investments from brown to green and invest        should help with TCFD-style reports and
                                      in negative emissions technologies.”              have been used to inform stress tests by the
                                                                                        French central bank.
                                      3. The US reawakens                                  A recent report by the London School of
                                      After four years in the wilderness, the US        Economics, which examines the pandemic
                                      is expected to push forward with action on        response measures by central banks in 180
                                      climate change.                                   countries found that just one – Fiji – takes
                                         President-elect Joe Biden has pledged to       climate and sustainability factors into
                                      rejoin the Paris Agreement, and has made          account.
                                      climate change one of his top four priorities.       Since then, Sweden’s Riksbank has said
                                         Despite the current administration having      it will start to exclude corporate bonds
                                      ignored climate change, there was a growing       from its asset purchases on norms-based
                                      trend towards climate action at city, state and   criteria, such as breaches of the UN Global
                                      company level.                                    Compact.
                                         What will Biden do to make up for lost
                                      time?                                             5. Natural capital concerns
                                         Biden’s website says: “As president, Biden     Accelerated by the Covid-19 pandemic,
                                      will lead the world to address the climate        investors are rapidly waking up to the
                                      emergency and lead through the power of           dangers posed by biodiversity and habitat
                                      example, by ensuring the US achieves a            loss.
                                      100% clean energy economy and net-zero               There have already been numerous
                                      emissions no later than 2050.”                    developments, such as a report by the
                                         So, will he set an official net zero target,   Dutch central bank saying that the country’s
                                      for example? What will his Green New Deal         financial institutions held €510 billion ($600
                                      look like?                                        billion) of investments that were exposed to
Environmental Finance | Winter 2020                                                                                                   7
Are banks really going green, or just greenwashing? - WINTER 2020 www.environmental-finance.com
Themes to watch

biodiversity risks.                                                                                it could boost credibility.
   Earlier this year, four French fund
managers — Axa Investment Managers,                                                                7. Implementation of the EU
BNP Paribas Asset Management, Mirova
and Sycomore Asset Management –
                                                                                                   Action Plan
launched an initiative to develop a tool                                                           The EU’s ambitious and sprawling
to help investors integrate nature and                                                             Sustainable Finance Action Plan is the
biodiversity considerations into their                                                             biggest concerted policy effort to implement
decision making, while a group of Dutch                                                            sustainability into the financial system.
financial institutions established the                                                                But as its efforts start to bear fruit, what
Partnership Biodiversity Accounting                                                                impact will it have on the market?
Financials to measure the positive impact of                                                          It has so far made progress on initiatives
investments in biodiversity.                                                                       such as a ground-breaking taxonomy of
   2021 could be the year of action.                                                               climate mitigation and adaptation activities,
   There are hopes that the UN Biodiversity                                                        which will underpin initiatives such as a
Conference in Kunming, China, between                                                              green bond standard. Its taxonomy is out for
17-30 May will lead to commitments for ‘no                                                         consultation, but it leaves the highly political
net biodiversity loss by 2030’.                                                                    question of nuclear in the balance – could it
   The Task Force on Nature-related                                                                find its way back into the programme?
Financial Disclosures (TNFD) this year               Mark Carney: Investors should be given           It has appointed a ‘Platform’ on
established an informal working group to          an automatic advisory vote on companies’         sustainable finance, which will start the
help financial institutions better understand     transition plans                                 work of extending the taxonomy into other
and report their nature-related risks and                                                          environmental and social areas. It is also
impacts. In collaboration with the corporate                                                       set to consider looking at a so-called brown
sector, reporting frameworks will be              EU has announced plans to raise, via green       taxonomy – covering activities that are
developed in 2021, and tested early in 2022       bonds, some 30% of the funds it intends to       environmentally harmful.
before being made available worldwide. The        borrow from public markets and has already          It has published low-carbon and transition
Task Force will be fully established in the       issued over €30 billion of social bonds to       benchmark criteria – will this trigger a raft
second half of 2021.                              help protect jobs.                               of new indexes, and how extensively tracked
   This trend will likely lead to more               “Overall, we expect sovereign and SSA         will they be?
products to address biodiversity loss,            issuance to make up a growing share of              Sustainability disclosures will begin in
particularly those that focus on land use and     overall [labelled] bond issuance in 2021, as     2021 but many are claiming that there is
the blue economy.                                 governments find ways to fund their large        insufficient data to allow them to report,
   For example, Pollination Capital and           stimulus spending,” the note said.               particularly asset managers.
HSBC have launched a $1 billion fund to              Meanwhile, the Sustainability-linked             Perhaps most importantly of all, will
focus on natural capital solutions (see page      Bond Principles were launched in June and        its regulations and initiatives be emulated
24).                                              there have already been six issues since,        elsewhere around the globe, making the EU
   Environmental Finance has launched a           raising more than $6 billion combined,           the standard bearer of sustainable finance?
channel on natural capital to make stories        according to Environmental Finance’s Bond
on biodiversity and other aspects of natural      Database.                                        8. Transition
capital easier to find.                              A transition finance handbook was             Transition will remain the real ‘buzz word’
                                                  released in December. However, debate            in 2021. After all, the aim of the game is
6. The labelled bond market at a                  rages as to whether such a label is needed, or   to move away from ‘business as usual’ to
                                                  whether the standard green bond label can        something more sustainable, preferably
crossroads                                        incorporate transition.                          alignment with the 1.5°C goal of the Paris
It has been an interesting year for the              The labelled bond market is evolving fast     Agreement.
labelled bond market. The green bond              but is also under intense scrutiny to prove         Mark Carney recently suggested investors
market has finished with a flourish, despite      that it ‘makes a difference’ and is not just a   could be given an automatic advisory vote
a blip as a result of the pandemic, while the     marketing gimmick.                               on companies’ net-zero transition plans,
social bond market enjoyed a stellar year,           Sustainability-linked bonds are gaining       similar to ‘say on pay’ shareholder rights to
with a seven-fold rise in the value of issuance   traction but to what extent will they help       vote on executive remuneration.
compared with the previous year.                  this market grow, or will they cannibalise it?      However, it is a subject that continues to
   A recent note from Barclays said ongoing       The green bond market could also take a hit      be fraught with controversy.
government stimulus could help boost              to issuance volumes as a result of the EU’s         The real problem is that we still don’t
labelled bond supply. It points out that the      forthcoming green bond standard. However,        know what the scenarios are or what the
8                                                                                                                 Environmental Finance | Winter 2020
policy pathways are. It will be interesting         But the extent to which impact can             are ‘green’.
to see if regulators, perhaps through the        become a mainstream investment category,             But there are concerns around whether
NGFS, build some central scenarios under         rather than a niche, remains to be seen. After    offsetting is really the right answer. The
which everyone must report.                      all, a case can be made for ESG because           ‘Financing credible transitions’ paper from
   While some feel that a separate transition    it can be used to help mitigate risks. But        Credit Suisse and Climate Bonds Initiative
finance label is needed, others argue that       making investments that produce a positive        doesn’t consider them to be a serious
the EU taxonomy of sustainable finance           impact on people and planet alongside a           solution, for example.
activities should suffice because it contains    financial return is a harder sell to investors       The Taskforce will issue a final report
stretching targets for sectors that need to      with fiduciary duties.                            in January, including a roadmap for
transition, such as cement and steel.               The PRI is incorporating “real world           implementation.
                                                 outcomes” into its reporting next year, in a         The market seems set for rapid growth,
9. Just transition                               nod towards where the market is heading.          and prices could also be pushed up by the
Countries that have signed up to the Paris       However, this has proved controversial,           standardisation of credits.
Agreement have agreed to “take into              with Norway’s giant sovereign wealth fund
account the imperatives of a just transition     warning of mission creep.                         12. Consolidation of ESG
of the workforce and the creation of decent         A report from law firm Freshfields into
work and quality jobs in accordance with         impact investing, which has been delayed
                                                                                                   reporting standards
nationally defined development priorities”.      until 2021, could make a significant              In November, we learned that the
   Companies must also take notice. In           difference – in the same way that a similar       Sustainability Accounting Standards Board
November, energy utility SSE published           report published in 2005, around ESG and          (SASB) and the International Integrated
what it says is the first company Just           fiduciary duty, helped boost the uptake of        Reporting Council (IIRC) are to come
Transition plan, following pressure from         ESG.                                              together to form a new organisation, the
investors to spell out how it plans to support      Environmental Finance has its own              Value Reporting Foundation.
employees, consumers and its supply chain        dedicated Impact channel.                            The merger is a significant step towards
as it cuts its emissions to net zero by 2050.                                                      simplifying the corporate reporting
   Its 19-page Supporting a Just Transition      11. Voluntary carbon markets set                  landscape, linking the IIRC’s integrated
document sets out 20 principles across five                                                        reporting framework with SASB’s disclosure
key themes: good green jobs; consumer
                                                 to boom                                           standards.
fairness; building and operating new assets;     A Mark Carney-initiated taskforce focused            The Value Reporting Foundation, which
looking after people in high-carbon jobs; and    on rapidly scaling up global voluntary            will be led by SASB chief executive Janine
supporting communities.                          carbon markets in November opened to              Guillot on its formation ‘in mid-2021’ could
   To coincide with the publication of           consultation on its initial report on forming a   eventually integrate other entities, and the
SSE’s strategy, investors Friends Provident      global carbon market.                             Foundation and the Climate Disclosure
and Royal London published a set                    The Taskforce on scaling voluntary             Standards Board (CDSB) have jointly
of ‘expectations’ for energy utilities when      carbon markets (TSVCM) said voluntary             signalled interest in entering into exploratory
developing just transition strategies. Colin     carbon markets must jump 15-fold by 2030          discussions in the coming months.
Baines, investment engagement director           to achieve global climate goals of limiting          The merger will also advance the work of
at Friends Provident, told Environmental         global temperature rises to 1.5°C by the end      the Statement of Intent To Work Together
Finance the investor has been working with       of the century.                                   Towards Comprehensive Corporate
Royal London on similar engagements with            Although recognising that the voluntary        Reporting. Published in September, this
EDF, Eon, RWE, Centrica and Iberdrola-           carbon market has made “significant               was a summary of alignment discussions
owned Scottish Power.                            strides” since its early days in both market      among leading sustainability and integrated
   Expect more focus on the Just Transition      functioning and credit integrity, in order        reporting organisations including the IIRC
in the build-up to COP26.                        to be able to scale significantly, “structural    and SASB as well as the CDSB, CDP and
                                                 challenges” need to be solved, including a        the Global Reporting Initiative (GRI).
10. Impact – can it go mainstream?               lack of consistency and price transparency.          Guillot said: “We stand ready to engage
                                                    The Taskforce outlined 17                      with the efforts of the IFRS Foundation,
Impact investing is an exciting and rapidly      recommendations across six topics. These          IOSCO, EFRAG, and others working
growing part of the sustainable finance          include establishing core carbon principles       towards global alignment on a corporate
market. Some argue it is the next phase          (CCP) that could be used to create                reporting system.”
of sustainable investment, following ESG         standardised benchmark contracts to be               In July this year, SASB and the GRI
integration.                                     listed on exchanges.                              also announced a collaboration to show how
   Big firms such as Bain are lending               As well as companies making net-zero           their two standards can be used together to
credibility, in the form of scale, with the      commitments, more investors are turning to        help ease the reporting burden.
launch of $1 billion impact funds.               offsetting to help them claim that portfolios        So, watch this space!
Environmental Finance | Winter 2020                                                                                                              9
Fixed income

ESG Ratings in fixed
income: A good start
ESG ratings should only be used as a first step when it comes to assessing
issuers, a panel at Environmental Finance’s ESG and Fixed Income 2020
conference heard. Ahren Lester reports

P
            roviders of environmental,        ESG rating for a company. Issuers are
            social and governance (ESG)       rarely informed about when or how these
            ratings have been urged           changes happen, however.
            by fixed income market              Federated Hermes research and
            participants to be more           sustainable fixed income head Mitch
transparent with their underlying data        Reznick warned that using ESG ratings
and methodologies, so that the tools can      as the key performance indicator on
become more credible and convenient.          which the coupon of sustainability-linked
   Speaking at Environmental Finance’s        bonds hinge should be avoided for as
ESG in Fixed Income Europe 2020               long as there is the risk that issuers could
virtual conference, Moody’s Investors         go “ratings shopping” to find the most
Service ESG senior vice-president             favourable score to use. This is an issue
Swami Venkataraman said “the scores are       compounded by the lack of transparency
important, but I think equally important      on data and methodologies.
– or perhaps even more important – is
the reasoning and the thinking behind the     Importance of ratings analysis
scores”.                                      However, Reznick said ESG ratings are an
                                                                                               Swami Venkataraman, Moody’s Investors
   Ørsted ESG engagement head Christine       “important part” of the analysis, assessment
                                                                                             Service: look beyond the ESG scores
Sobieski added that there is increasing       and pricing of ESG risks as a quick and easy
interest from banks using ESG ratings         way to grab information for an initial look.
in sustainability-linked loans, raising the      He told Environmental Finance, however,
prospect that they could find their way       that it was a “colossal mistake” for           ESG detail from a first look in a note
more extensively in the fixed income          investors to merely run ESG ratings over       when looking at a universe of 20,000
market through sustainability-linked          their portfolio.                               companies,” he said. “So, we need to start
bonds in the future.                             ESG Portfolio Management managing           somewhere, and that is where we use
   “This is a really positive development,”   partner Christoph Klein agreed that ESG        ESG ratings to screen the issuer. But it is
she said. “But I would say that in order      ratings are “just a starting point” in his     just the first step, and all the other analysis
for us, as a company, to be more likely       ESG fixed income investment process,           follows after that.”
to actually use ESG ratings in the            effectively serving as an initial exclusion
sustainability targets that are linked to     filter, before digging deeper into the         Mixed messages
such financial instruments, I think that we   company. Klein said the firm starts by         Reznick emphasised that ESG ratings
will need to see more transparency and        selecting only BBB or higher ESG-rated         come with significant downsides – not
predictability around the methodologies       firms before applying additional exclusion     least being that not all ESG ratings
used by ESG ratings.”                         criteria and then measuring their impact       “deliver the same message” on ESG for
   She added that ESG ratings agencies        on the UN Sustainable Development              the same issuer. One rating may focus
adjust their methodologies regularly,         Goals (SDGs) and climate risk.                 on the financial materiality of their ESG
sometimes resulting in changes to the            “It is just impossible to get full          profile, whilst another may be focused on
10                                                                                                         Environmental Finance | Winter 2020
Christine Sobieski, Ørsted: Need for more      Mitch Reznick, Federated Hermes: ESG             Christoph Klein, ESG Portfolio
transparency and predictability around         ratings are an “important part” of the analysis   Management: Ratings are “just a starting
methodologies                                                                                    point” in the investment process

the ESG values woven into the fabric of        record? Do you say that it may be electric        ‘Here to stay’
the company itself. The outcome is that        cars, but the cobalt is being mined using
there is often limited correlation between     child labour in the Democratic Republic           Reznick suggested ESG ratings may
ratings.                                       of Congo? Oftentimes, ESG investors               have been “eclipsed” by the “increasingly
   Venkataraman agreed, explaining             are not all the same and they can give            sophisticated” way investors now handle
that Moody’s has its own ESG scores            importance to different aspects of this,          ESG. He said investors are asking about
increasingly integrated into its core          just as ratings do,” he said.                     carbon footprints of a portfolio, or
credit reports which focus on financial                                                          other socially responsible investment
materiality. Meanwhile, Moody’s owns           Looking forward                                   metrics, which ESG Ratings often do not
V.E, formerly known as Vigeo Eiris,            There is also the challenge of the largely        provide. Instead, he is turning to tools,
which takes a “broader perspective” on         backward-looking data underpinning the            such as those provided by CDP and the
ESG Ratings and looks beyond financial         ESG Ratings. Sobieski said that an ESG            Transition Pathway Initiative (TPI).
materiality.                                   Rating – which usually lasts a year – can be         ESG ratings are “here to stay,” he adds,
   “We acknowledge the need for that and       based on data that is as much as two years        but “every analyst and portfolio manager
why some investors may want to have that       old. Even the freshest ratings, however,          needs to really dig further – talk to the
perspective as well,” he said.                 only offer a snapshot of the ESG profile          companies and use the other primary
   In August 2019, the Massachusetts           of a company at that moment in time               sources of information that are out there”.
Institute of Technology published a            with little consideration for their forward-         Venkataraman said this approach was
research paper of five ESG raters – V.E,       looking ESG trajectory.                           not hugely different from how credit
KLD, RobecoSAM, Sustainalytics and                “Maybe I build a portfolio of low rated        ratings are used by investors. “Credit
Asset4 – which showed an average               bonds from an ESG point of view, but I            rating agencies put out our ratings – and
correlation of 0.61 between their ESG          think these are the transition companies          investors want them and use them – but
scores. In contrast, the correlation of        that are moving in the right direction,”          investors have their own credit analysis
the credit ratings of Moody’s Investors        said Reznick. “It makes sense to be in            process in coming up with their own
Service and S&P Global Ratings – the           those corners of the market as well as with       judgement. I see the use of ESG Ratings
two main providers – stood at 0.99.            the leaders. I think that is how you affect       as being very analogous to that.”
   Venkataraman said that this lack of         change as well.”                                     So, is it time to regulate ESG ratings
correlation was not a case of “factual            Klein agrees that it is “absolutely clear”     like credit ratings? Reznick does not
divergence” but rather of different            that focusing on transition is the way to         think this is required until ESG ratings
emphasis. As an example, he pointed to         drive positive ESG change. “If you only           have a similarly material financial impact
US electric vehicle maker Tesla.               buy the best, it can be expensive. It is all      on pricing and valuations as their credit
   “Do you say they have an excellent          about your future potential – both in price       cousins.
climate profile? Do you say that they          terms, but also on ESG and sustainability            “I’m not sure we are there yet,” he
have a controversial governance track          terms.”                                           said.
Environmental Finance | Winter 2020                                                                                                         11
Green bonds

Green bonds begin to flow
from emerging market banks
A pioneering initiative by the IFC to encourage green bond issuance by banks in
emerging markets is bearing fruit, reports Graham Cooper

G
             reen bonds have now been issued     Jean-Marie Masse, chief investment officer      arranged by Symbiotics.
             by more than 65 countries. But      at the IFC. “We teach them the benefits of      Symbiotics provides advice to banks,
             the market remains dominated        green bonds and how to issue them.”             pension funds and other institutional
             by development banks, European         The training was designed in partnership     investors about sustainable and inclusive
             sovereigns and utilities, and       with the International Capital Market           finance and serves as an asset manager
government agencies in Europe and the US.        Association (ICMA) and gives bankers a          for their ‘impact’ investments, particularly
   Issuance from emerging markets has            grounding in the Green Bond Principles          in developing countries. Two Symbiotics
grown rapidly in the past year but, aside        and the importance of green bond issuers’       executives attended the Stockholm course,
from China and a few sovereign issues, the       disclosures to investors, with case studies     so “we were training the trainers,” notes
bulk of these bonds have come from the           and workshops helping to illustrate best        Masse.
energy sector.                                   practice.                                          All four Turkish deals were labelled green,
   This is starting to change, however, thanks                                                   sized at $50 million, and listed in Dublin.
largely to an educational initiative aimed at
financial institutions in emerging markets
                                                    “We teach them the                           They varied in tenor between four and 10
                                                                                                 years. The Ego fund has allocated about 3%
which forms part of the International             benefits of green bonds                        of its assets to each of them.
Finance Corporation’s (IFC) Green Bond                                                              The Symbiotic bonds were smaller in
Technical Assistance Program (GB-TAP).            and how to issue them”                         size – ranging from $3.5 million to $10.25
Organisations attending the course have                 Jean-Marie Masse, IFC                    million – and their proceeds were used for
issued eight bonds since August 2019,                                                            loans to financial institutions in Sri Lanka,
raising a combined $228.25 million.                                                              Peru and India. The latter two were labelled
   GB-TAP was launched in January                   In total, 19 banks from 11 countries         as social bonds while the Sri Lankan deals
2019 to complement the Amundi Planet             were represented on the course: Thailand,       were both labelled green. One of the Sri
Emerging Green One (Ego) fund – the              Philippines, Indonesia, Georgia, Armenia,       Lankan bonds was issued in US dollars but
world’s largest emerging market green bond       Turkey, South Africa, Nigeria, Benin,           the other three bonds were issued in local
fund – in which the IFC is a cornerstone         Togo and Senegal, says Johan Nordlund,          currencies.
investor. While the $1.42 billion fund created   programme director – finance, at the               Symbiotics used a special purpose vehicle
demand for emerging market green bonds,          Stockholm School of Economics Executive         – Micro, Small and Medium Enterprises
the GB-TAP was designed to create supply.        Education. They were joined by two              Bonds SA – to issue these bonds, which
   The training course at the heart of           representatives from Symbiotics, a European     are all listed in Luxembourg. This structure
GB-TAP was initially run as a two-day            firm that helps arrange financing for micro,    allows a single issuing framework to be
event in Singapore and Thailand, then as         small and medium size enterprises in            used for all four bonds, thus minimising
a five-day course at the Stockholm School        emerging and frontier markets.                  transaction costs, notes Dirk Dijksma,
of Economics in June and October 2019.              Covid-19 has brought an end to the in-       Symbiotics’ Geneva-based head of
Attendance on the Stockholm courses was          person events but the course material is now    innovation investments. Each bond is linked
by invitation only and preference was given      being converted into an online format. This     to a single loan, he explains.
to banks that were already issuing in the        will first be presented to bankers in Eastern      “I see huge potential” in this model,
traditional bond market.                         Europe and Africa and then, on a separate       says his colleague Mattia Corato, a
   The course tutors explained why green         occasion, to potential issuers from Latin       London-based portfolio advisor. Two more
bonds could be a better option for such          America, says Masse.                            bonds – both from Armenian banks – were
banks, by helping them broaden their                The bonds issued since the Stockholm         coming to market as this article went to
investor base and motivate their staff, in       training fall into two groups. Four were        press. One was labelled green, the other
addition to the environmental benefits, says     issued by Turkish banks and four were           sustainability.
12                                                                                                             Environmental Finance | Winter 2020
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The big debate

Transition bonds
                                                 and participation from more issuers along
 Yes, argues Marisa                              the credit curve.                                   The five transition principles
                                                    In respect of transition investment              The Financing Credible Transitions paper
 Drew of Credit Suisse                           opportunities, investors were also                  lays out five principles for an ambitious

F
                                                 beginning to grumble about the fact that            transition:
                                                                                                     1. Align with zero carbon by 2050 and
            irst, let me explain why we          there are many self-labelled ‘transition’              nearly halving emissions by 2030;
            launched in September the            or other types of labels cropping up, but           2. Be led by scientific experts and not be
            Financing Credible Transitions       with no consistency to the labels and no               entity- or country-specific;
            white paper with the Climate         agreed methodology or market-adopted                3. Be sure that credible transition goals and
            Bonds Initiative (CBI). The          framework to govern the transition market              pathways don’t count offsets;
                                                                                                     4. Include an assesment of current and
documents present a framework designed           and help protect it from greenwashing.                 expected technologies which can be
to support the rapid growth of a transition         Meanwhile, from the issuer community,               used to determine a decarbonisation
bond market and define what a transition         I was hearing a great deal of frustration              pathway;
label should encompass.                          from high carbon-emitters that really do            5. Be backed by operating metrics rather
                                                                                                        than a commitment or pledge.
   I was hearing directly from institutional     want to make the investment to transition,
debt investors who were keen to put more         but do not qualify under existing green
money to work in sustainable strategies          bond market principles to access that              apply not only at a use of proceeds level
generally, but also specifically in supporting   market. These companies recognise that             but also at an enterprise level – we are
transition opportunities. In addition to         they need a huge amount of investment to           trying to encourage whole-business model
wanting to see more brown-to-green               migrate their business models and would            transitions in addition to investments in
corporate issuance, they wanted to see a         like to access a dedicated pool of transition-     greener activities or projects. And we want
broader definition and more diversity in the     aligned capital.                                   to make sure that the transition label and
‘uses of proceeds’ in the green bond market         In response, we surfaced these issues           concept is not limited to debt; we think this
                                                 to the CBI, who agreed that there was a            should be applicable to equity issuances,
                                                 gap in the market. We first explored the           asset-backed structured solutions, and so
                                                 possibility to expand the existing Green           on.
                                                 Bond Principles (GBPs) in an attempt to               We actually think sustainability-linked
                                                 bridge this gap and meet these stakeholder         bonds and loans represent a subset of
                                                 requests. There was, however, a general            transition finance that can neatly fall under
                                                 reluctance to adjust the GBPs because they         our proposed transition framework and
                                                 are well understood by the market and              ethos.
                                                 operate effectively and efficiently at scale.         They are not mutually exclusive – we
                                                    Instead, we birthed the notion of creating      think they’re actually complementary. That
                                                 a ‘sister market’ to sit alongside the green       said, not all issuers or investors want to see
                                                  bond market, with a specific framework            their coupons linked to sustainability KPIs,
                                                  and robust set of principles for those            and linking the cost of capital to KPIs does
                                                     dedicated to a sustainable transition.         not work for all asset classes.
                                                       And after a year’s work we came out             We want to encourage the broadest,
                                                         with a paper to articulate this vision.    most inclusive lens when thinking about
                                                          For issuers looking to use the            the provision of capital to fund transitions
                                                          transition label, it prescribes five      while still protecting the integrity of
                                                          principles (See box).                     the markets to allow them to scale with
                                                              Given the investment needs of         confidence.
                                                           trillions of dollars to ultimately get
                                                           us globally to a net zero emissions          Marisa Drew is chief sustainability officer
                                                                                                    and global head of sustainability strategy,
                                                            status, we wanted this framework        finance and advisory at Credit Suisse.
                                                             to have a broad reach and to
14                                                                                                                 Environmental Finance |Winter 2020
Is a transition bond label still needed, now that the Sustainability-Linked Bond
Principles have been published?

                                                                                                                                           Taxonomy would provide3) the risk of
  No, argues Jacob                                                                                                                         ‘Greenwashing’ goes up. To this extent,
                                                                                                                                           it seems to me that, from a broad market
  Michaelsen at Nordea                                                                                                                     perspective, ‘Transition Bonds’ carry
                                                                                                                                           more potential downside risk than we
Note: For the purposes of this article, the term Transition Bond
refers to ‘use of proceeds’ bonds only                                                                                                     can hope to gain from them.

L
           et me be clear to begin with –                                                                                               Sustainability-linked structures are
           ‘Climate Transition Finance’ is                                                                                              better suited to address
           arguably the most important                                                                                                  transitioning anyway
           topic for the sustainable finance
           market to deal with in the                                                                                                   More specifically to the point of this
coming 12-36 months. And rightfully so.                                                                                                 article, I maintain that Sustainability-
  We have already spent considerable time                                                                                               Linked Bonds (SLBs) are better
on accepting Green into the mainstream,                                                                                                 suited to deal with transitioning than
and have even gone to great lengths in                                                                                                  Transition Bonds, for the simple point
codifying this in a Taxonomy as part of                                                                                                 that sustainability-linked structures are
the EU’s Sustainable Finance Action Plan.                                                                                               forward-looking in nature, and use-of-
This inevitably leaves the topic of ‘Brown’                                                                                             proceeds are not (necessarily). That is,
or ‘Transition’ (recognising that these                                                                                                 SLBs require improvements on a KPI
terms are not synonymous) as the next,                                                                                                  – or the transitioning from something to
but not final, frontier.                                                                                                                something better.
  Indeed, this was recognised by the EU-                                                                                                   That is in contrast to Transition Bonds,
appointed Technical Expert Group on                                                                                                     where we cannot guarantee overall
Sustainable Finance in their final report                                                                                               improvement of the issuer, but simply that
on the Taxonomy, where they highlighted                                                                                                 the underlying projects are “not as dirty as
that a fully realised Taxonomy should                                                                                                   they could be”.
incorporate also “technical screening                                  anything that is not ‘Dark Green’                                   Obviously the market for SLBs is still
criteria for significant levels of harm to                             represents transitioning.                                        in its infancy and one could certainly
environmental objectives. (...) So-called                           2. Green bonds are/should be for                                    highlight that we need better definitions
‘brown’ Taxonomy criteria.”                                            everyone. To this point, it is somewhat                          of what “material” and “ambitious”
                                                                       hollow to say that an oil company can’t                          means – especially in the context of
The case against ‘Transition                                           issue a green bond if you would buy                              transitioning. That said, I maintain that,
Bonds’                                                                 a green bond from any of the major                               for the time being, we are better off, as
                                                                       banks, most of whom have significant                             a market, to give SLBs our full attention
With that said, let me also be clear and                               oil-related exposure on their balance                            instead of diverting it to a label that is not
state that I do not believe the market                                 sheet. In any case, isn’t a green bond                           fully understood and which may call into
currently needs a new Transition Bond                                  from, say, an oil company seeking to                             question the validity of the overall labelled
label. The key reasons for this are:                                   invest into renewable energy not the                             bond market. That hardly seems a sensible
1. ‘Transition’ is already baked into the                              purest form of transition there is?2                             move to me.
   Green bond market. This is eloquently                            3. In the absence of clear and well agreed-
   formulated in the ‘Shades of Green’1                                upon definitions for what constitutes a                              Jacob Michaelsen is head of sustainable
                                                                       relevant transition (such that an updated                        finance advisory at Nordea.
   methodology, where, in essence,

1. As popularised by ‘CICERO Shades of Green’, the second party opinion provider
2. I recognise that many would argue that this would require a credible transitioning story away from fossil-based energy production. A valid point, but one that deserves more nuance than can be
   afforded here.
3. There is already a number of credible and relevant initiatives providing guidance on this, such as the Transition Pathway Initiative

Environmental Finance | Winter 2020                                                                                                                                                                  15
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