11/2/2020 0 Comments Sustainable Value MetricsUsing Sustainable Value Metrics to access sustainable and green finance
There is a lot of green and sustainable debt capital available On 8th January 2020, BloombergNEF reported[1] that sustainable debt finance issued during 2019 rose 78% during 2019 to over USD 465 billion . This is a vast and rapidly growing pool of capital being directed by investors, funds and banks towards green and sustainable debt finance. Most of this was in the form of Green Bonds (over USD 260 billion issued in 2019) and the pace of issuance of green bonds is predicted to accelerate further - with Lombard Odier predicting in January 2020 that the global green bond market to expand again to USD 320 billion during 2020[2]. This prediction may prove to be too cautious given the pace at which investible Green and Sustainable bonds and debt capital pools are being created. A good early example in 2020 was the issuance of a EUR 300 M green covered bond on Monday 20th January by the European bank group Nord/LB under Luxembourg law[3]. This was the first issuance of a green covered bond under the amended Luxembourg Pfandbrief Act for “Lettres de Gage” (2018) – with proceeds dedicated to green financing of wind energy and solar projects. If you are curious to see how the bond works – work through the prospectus and compliance documentation supporting this issuance – available from the Luxembourg Stock Exchange[4]. Why should I be interested in the growth in green and sustainable debt funding? There are several reasons - and running across all of them is an increasing sense of urgency by investors, communities, governments and regulators to address the need to invest in the global economy’s transition to a low carbon economy. Funding is being redirected towards sustainable outcomes and priorities. Don’t leave yourself or your business starved of capital by ignoring what’s happening. First reason: ESG is now mainstream “ESG” usually means “Environment, Society and Governance” - though I have seen variations on these terms. Essentially, it’s about understanding, measuring and improving the impact of your company operations on the environment and communities you operate in. Understanding ESG is now a basic hygiene factor around a corporation’s license to operate in a community – and this understanding is a core competency for company directors and managers. Most ESG compliance frameworks require a company to first set KPI’s around its ESG objectives and then to measure and report against these objectives. Many ESG frameworks draw from and reference the 17 United Nations Sustainable Development Goals (SDG’s)[5]. Building from the SDG’s there are now many different frameworks and tools available to assist implementing a robust ESG framework. A good place to start is the ESG Disclosure Handbook [6] and other material published by the World Business Council for Sustainable Development. Providers of debt capital (banks, venture capital funds, pension funds and other investors) are saying that they now require their borrowers to have a high ESG rating in order to attract a loan. Why is this? Because their investors and depositors – both large and small - are demanding that their money is deployed towards sustainable investments and business activities. A recent global survey of over 25,000 retail investors by Schroders found that the majority of investors in Asia (73% in India; 66% in China) are actively directing their investments into high ESG rated investments[7]. So, to maintain alignment with their depositors and investors – banks and other providers of debt capital are now packaging it into product channels for deployment – mostly into green loans and bonds and sustainable finance lending. You’ll only get access to this debt capital if you can demonstrate a strong understanding of ESG in your business, can report on your ESG footprint to your bankers and other stakeholders (especially customers and shareholders) and your use of the capital (green loan or sustainable finance) will further improve your ESG rating (for example – your green loan may be to enable you to invest in renewable energy systems that will reduce your emission of greenhouse gases). Second Reason: Regulators are now focussing on the business and economic risks arising from climate change Most advanced economies have regulators that operate independently (or semi independently) from the government of the day. There are many types of regulators – but the most important for the financial system and the economy are usually the central bank (in Australia that’s the Reserve Bank), the corporate regulator (in Australia that’s ASIC - the Australian Securities and Investment Commission) and the bank and insurance regulator (in Australia that’s APRA – the Australian Prudential Regulation Authority). It’s the job of the regulators to try to maintain economic stability and reduce the adverse impacts of financial risks to the economy – these risks ranging from financial crime to adverse economic cycles and external shocks such as the current corona virus outbreak in China. The Bank of International Settlements (BIS) is effectively the global central bank regulator – with most advanced economies as members. The BIS makes recommendations – that are usually adopted – about how each country should manage its banks and other financial system operators to maintain economic stability and reduce the impact of economic shocks. In January 2020 the BIS released a paper called The Green Swan: central banking and financial stability in the age of climate change.[8] It’s a fascinating read – and get ready for its recommendations to filter through to the thinking of your local central bank and other local regulators. Quoting from the paper’s abstract: Central banks can therefore have an additional role to play in helping coordinate the measures to fight climate change. Those include climate mitigation policies such as carbon pricing, the integration of sustainability into financial practices and accounting frameworks, the search for appropriate policy mixes and the development of new financial mechanisms at the international level. In Australia right now, despite the fact that the government of the day is reluctant to accept the economic impact of climate change, the regulators are getting on with trying to deal with the economic risks of climate change anyway. Australia’s APRA published a discussion paper[9] on climate risk in March 2019 summarising its view of climate risk and referencing the work it was doing to monitor and reduce the risks to the financial system from climate change – including enhanced supervisory action and domestic regulatory coordination and development of climate change analytical tools. Similarly, Australia’s ASIC is now busy issuing regulatory guidance on climate change risk based on guidelines issued by the G20 Financial Stability Board’s Taskforce on Climate Related Financial Disclosures (TCFD) . Third Reason: Your shareholders will demand it. At the BP annual general meeting in Scotland on 21 May 2019, 99% of shareholders supported a binding resolution filed by shareholders acting as the Climate Action 100+ group requiring the company to adopt a business strategy consisted with the goals of the Paris Agreement on climate change[10]. This was after a long and bitter campaign over several years by activists. These actions are gaining momentum and company directors can no longer regard climate concerns as being from the fringe. Climate concern is mainstream and company owners and directors are foolish to pretend otherwise. How do I access Green and Sustainable Finance? Develop your Sustainable Value Metrics The most important thing is to sit down and work out how to adapt your business to focus on the generation of Sustainable Value and work out how to measure the Sustainable Value your business is creating for your shareholders and stakeholders. If you can articulate your vision for creating Sustainable Value, describe how you measure it and how you report it – and the difference you are making in moving your company and your people to a sustainable business footing - you will be able to access the new pools of debt capital piling up to help you do this. This work is an extension of the ESG frameworks that have been developed around the world over the last ten years and already in use in many applications. However, there are so many ESG standards and frameworks it can be hard to navigate through the forest. One of the most positive developments from the recent World Economic Forum (WEF) in Davos was the release in January 2020 of the Consultation Draft Paper - Towards Common Metrics and Consistent Reporting of Sustainable Value Creation[11]. This paper has done a brilliant job of integrating the existing regulatory and voluntary ESG frameworks in place in global financial and investment markets and proposes a unified set of 22 Sustainable Value KPIs and reporting standards that are clear and applicable within most global corporate reporting and accounting systems with International Financial Reporting Standards (IFRS). Importantly – the 22 measures relate back to the themes of the SDG’s under the four pillars:
The Consultation Draft sets out a set of 5 criteria to assess the proposed themes and metrics recommended. The January 202 WEF Sustainable Value Framework is an excellent template to use to start to develop your Sustainable Value Metrics. I think you will find it easier than you may initially think – a lot of the measures proposed are already in common use in business and accounting frameworks. Once you have developed your Sustainable Value Metrics – then you will be equipped to hold a conversation with your advisors and your bankers about how you are going to apply green and sustainable debt capital to contribute to a sustainable future. David L Thomas February 2020 [email protected] [1] https://about.bnef.com/blog/sustainable-debt-sees-record-issuance-at-465bn-in-2019-up-78-from-2018/ [2] https://www.lombardodier.com/contents/corporate-news/investment-insights/2020/january/cio-viewpoint-how-to-invest-in-a.html?skipWem=true [3] https://www.nordlb.com/nordlb/press/press-release/nordlb-cbb-successfully-issues-green-covered-bond-on-the-capital-market-for-the-first-time/ [4] https://www.bourse.lu/security/XS2079316753/301122 [5] https://www.un.org/sustainabledevelopment/sustainable-development-goals/ [6] https://docs.wbcsd.org/2019/04/ESG_Disclosure_Handbook.pdf [7] https://www.theedgemarkets.com/article/lead-story-asian-investors-most-keen-sustainable-investing [8] https://www.bis.org/publ/othp31.pdf [9]https://www.apra.gov.au/sites/default/files/climate_change_awareness_to_action_march_2019.pdf [10] https://www.iigcc.org/news/climate-change-resolution-at-bp-agm-from-climate-action-100-investors-passes-with-over-99-shareholder-support/ [11] https://www.weforum.org/whitepapers/toward-common-metrics-and-consistent-reporting-of-sustainable-value-creation to edit.
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