IFR’s ESG capital markets webinar in May convened a panel of three EU public finance borrowers active in the ESG-labelled debt market: the European Investment Bank; NRW.Bank, the regional promotional agency of Germany’s North Rhine-Westphalia; and SFIL/Caffil, the French local government and export financing agency. Joining them were second-party opinion provider Cicero Shades of Green and asset manager Amundi.
The event took place amid a deluge of labelled ESG bond and loan issuance. Propelled by strong technical issuing conditions that have also driven broader capital market volumes, ESG bond issuance had set a record of US$416bn by the middle of June, while labelled syndicated loan issuance reached US$251bn for a debt total of US$667bn. (Refinitiv defines sustainable issuance as labelled transactions plus standard issuance by companies in sustainable industry sectors.)
Interest in the ESG theme continues to flourish across green, sustainable and sustainability-linked formats. Social issuance continues to emerge, but the understandable push social bonds received on the back of Covid-19-related public health relief efforts was more a 2020 phenomenon, as vaccine and other mitigation efforts around the world start to get the better, slowly, of the pandemic.
The rule set governing the ESG theme continues to harden. The EU and the UK are pushing hard to build their regulatory frameworks. In the EU, the Sustainable Finance Disclosure Regulation took effect on March 10, making ESG disclosure mandatory for asset managers and financial market participants. For investors, having the SFDR in place before reasonable disclosure requirements are in place creates real-world challenges: being beholden to regulators around ESG claims while transparency requirements on the corporate side are lacking.
The imposition of regulatory requirements has laid bare the thorny issue of non-credible data disclosure. Without trustworthy data, getting investment into areas defined as sustainable by the Taxonomy Regulation, quickly and in size, is likely to be a problem. The issuers on IFR’s webinar panel all have their labelled issuance aligned with the Taxonomy and have worked hard on reporting. But as a broad statement, the uneven quality of ESG reporting needs fixing.
Cicero and Amundi spoke of the difficulties they encounter in gaining access to credible data in standardised templates. The lack of comparability across issuers and sectors is a real problem, as is issuer self-labelling, although this will be solved – at least partially – for EU issuers by the forthcoming Green Bond Standard. That said, instances of issuers raising thematic debt to fund discrete ESG asset pools while continuing to finance non-sustainable projects pose serious governance issues on the sustainable finance market. These need to be comprehensively dealt with.
The solution to poor disclosure is not just flooding the market with reams of additional unstructured data, the webinar participants said; it’s about disclosing the right kind of data in the right formats built with science-based targets.
The EU’s proposed Corporate Sustainability Reporting Directive will impose data standards and machine-readable data disclosure. And it will broaden corporate capture from 11,600 to 49,000 listed companies and large unlisted companies.