IFR ESG Capital Markets Roundtable 2021: Participants

KEITH MULLIN, KM CAPITAL MARKETS: A VERY WARM WELCOME TO THIS IFR WEBINAR ON ESG CAPITAL MARKETS. I’D LIKE TO KICK OFF BY ASKING EACH OF OUR ISSUERS TO DO A QUICK REVIEW OF THEIR ESG DEBT ISSUANCE IN 2020 AND 2021 YEAR-TO-DATE. Dominika Rosolowska, EIB: I represent the sustainability funding team at the EIB, which is responsible for structuring and issuing the two use-of-proceeds products we have – Climate Awareness Bonds (CABs) and Sustainability Awareness Bonds (SABs) – across all currencies and formats. For us, last year was a record year in terms of issuance. CABs and SABs contributed 15% of EIB’s overall funding programme of €70bn. We issued more than €10.5bn-equivalent across these two products. Such an increase in issuance – it was more than a two-fold increase versus 2019 – was made possible thanks to the way we structured the use-of-proceeds documentation for these bonds. Essentially, we made reference in documentation to evolving EU sustainable finance legislation, and the EU Taxonomy Regulation in particular. This permits us to add new areas of the bank’s activity in modular fashion as they become mapped according to the framework of the EU Taxonomy Regulation. Importantly, last year, we added Covid-19 emergency response as an area under our SAB framework, and we were able to increase multiple times the volume of SABs issued last year. This year, another addition to our SAB framework was the inclusion in January of another objective under the EU Taxonomy Regulation: the protection and restoration of biodiversity and ecosystems. The first new activity that we added corresponding to this objective was sustainable forest management. Biodiversity is a topic that is very much in focus at the moment and is one of the objectives the EIB is pursuing on the lending side. Coming back to currencies and tenors for our CABs and SABs, there haven’t been too many shifts. Euros and the US dollars are the two currencies EIB as an institution uses predominantly for its funding. That is reflected in our CAB and SAB issuance. Euros contributed around half of our use-of-proceeds issuance last year. However, this year we were able to access other markets such as the Australian dollar and Canadian dollar markets, with large transactions. We launched the largest-ever green Kangaroo bond and the largest and longest-ever Climate Awareness Bond in Maple format. We try to diversify our funding sources, to access new investors and diversify our investor base through the issuance of CABs and SABs. Some of these new additions this year, for instance, included the offshore renminbi issue that we did in syndicated format. [The EIB priced a A$1.25bn (US$1.08bn) 6.5-year Kangaroo CAB and a C$1bn (US$820m) seven-year Maple CAB in January; and a Rmb1bn (US$156m) CAB in April.] As for the market and the reception of investors to our strategy, this has been positive. We received a strong reception to the modular or gradual enlargement of our CAB/SAB eligibility criteria, allowing for the inclusion of the Covid-19 emergency response last year and biodiversity this year. As well as a strong response from investors, we are also able to access investors we see a bit less frequently in our [conventional] books as well as investors that showed up in our books for the first time, and are attracted by the CAB/SAB format. Frank Richter, NRW.Bank: Labelled bonds are becoming more important for us. Just to briefly recap, NRW.Bank is a German regional development agency, and, of course, fighting climate change is one of our core priorities. We have been active in the green bond market since 2013–2014 on a more or less regular basis. Our approach is always to be state of the art and to push market standards. Our US$500m 10-year green bond of January was aligned with the EU Green Bond Standard and with the EU Taxonomy. In general market terms, I would say Covid-19 was a catalyst for lifting the labelled b

KEITH MULLIN, KM CAPITAL MARKETS: CHRISTA, COULD YOU OUTLINE THE KEY THEMES FROM YOUR STANDPOINT AS A SECOND-PARTY OPINION PROVIDER? ALBAN SAID NO INFORMATION IS BAD INFORMATION; I GUESS THAT WOULD GO FOR YOU AS WELL. Christa Clapp, Cicero Shades of Green: Cicero Shades of Green is an external reviewer. We provide, at the time of issuance, second opinions and green ratings on green and sustainability bonds, and SLBs. And we also follow up with reviews of impact reports. Our methodology is based pretty deeply on climate science and we view our role as providing transparency on climate risk and potential climate environmental impacts. What Alban was saying about more data is true, but from our viewpoint we also want to make sure that we are looking at the right type of data and understanding it well. More data isn’t necessarily better; it’s actually understanding what the potential impact of that data is with the ambition of the green bond or the SLB, for example. We had a role to play in setting up the model for external review second-party opinions. We’ve been in the market since 2008, when we provided the first second opinion on the labelled green bond from the World Bank. That’s the model that continues today, where you have an independent reviewer provide checks against greenwashing, a first-level check – not the only check and it doesn’t solve everything. It’s absolutely best practice today to have an independent reviewer making sure that what the issuer is saying has some truth in it, in terms of being green. We hear from a lot of issuers that think they are the greenest of the green. When we dig into the details, the issuers might be a little less green, or there might be areas to work on. Of course, that’s probably true with every issuer. Our job is to link it back with the science. Some of the challenges we face are, of course, that at the time of issuance, we know what an issuer is telling us, and we know what the science tells us, and we try to put that together in a package for investors. But what we don’t know is precisely how that bond will be implemented, how those projects will be monitored, managed and reported on. We have some information about the plans but then we have to make a judgment call, and this is probably one of the biggest challenges we face. We try to reduce some of that uncertainty by including a governance assessment in our methods. When we review either a use-of-proceeds bond or an SLB, we include this governance assessment, we look at what is the issuer doing in the climate-change environment. Not only what they’re saying in their sustainability reports but what their targets are, how are they measuring towards those targets, and what their policies or internal processes are. Do they have committees with veto power on potentially high-risk environmental projects, for example. Do they look at the emissions from their supply chain and do they try to influence those. We ask all of these things and put them into an assessment, and it gives us an idea of how well we think an issuer can implement its green ambitions. Of course, this is extremely relevant for sustainability-linked bonds, where you’re also tying in environmental performance with financial performance, and you want to know the direction of the issuer. That’s a challenge in our role in the market; we try to provide transparency on that. One of the opportunities and an area that we see shifting quite fast is understanding actual impacts, so post-issuance reporting and follow-up. It’s become best practice to have an annual report out to investors but it’s not currently best practice to have that third-party check. The issuer may say the impacts are very nice and lovely, but are they reporting on the things that really matter most to the environment from its projects? That’s a service that we and others offer. Following on from Alban’s comments,

KEITH MULLIN, KM CAPITAL MARKETS: CHRISTA, I’D LIKE TO GET YOUR THOUGHTS ABOUT DATA QUALITY. THE EU TAXONOMY AND GREEN BOND STANDARD HAVE BEEN MENTIONED THROUGHOUT THE DISCUSSION, WE ALSO HAVE THE SUSTAINABLE FINANCE DISCLOSURE REGULATION AND THE PROPOSED CORPORATE SUSTAINABILITY REPORTING DIRECTIVE TO REPLACE THE NON-FINANCIAL REPORTING DIRECTIVE. THERE IS A MOVE TO MAKE SURE THAT COMPANIES DISCLOSE, AND DISCLOSE IN A MATERIAL FASHION. HOW WOULD YOU SUMMARISE THE QUALITY OF DISCLOSURE TODAY? DO YOU HAVE ENOUGH? IF YOU DON’T, WHAT DO YOU DO ABOUT IT? Christa Clapp, Cicero Shades of Green: If I had to put just one word on it, I would say “patchy” at best as an overall comment about where the market is. Of course, we work with some issuers that are very well prepared and have done their homework. That makes our job easier, and their job easier too. But we have found, particularly with the Taxonomy as we look at some preliminary alignment pieces, that there seems to be a little bit of a misperception in the market that Taxonomy alignment is simply a matter of data on the environment thresholds for the activities. But the Taxonomy has three requirements for alignment: meeting the environmental threshold; not doing significant harm on the other environmental and sustainability criteria; and meeting the minimum social safeguards. Those are three checks that we need to go through with an issuer. And often they’ve prepared, maybe, the first step, and not the others. And it does require a different level of data, especially for not doing significant harm, and a level of interpretation on our side, as well, to make sure that we’re striking a balance between what is necessary to know in terms of avoiding negative environmental impacts, but, at the same time, making it reasonable for issuers to come to market. That’s a challenge of usability as we start implementing the Taxonomy that we all have to work through. As I said earlier, I think the answer is not more data, it’s the right kind of data. We need to understand the data. We need to understand, for example, that a new building is not being built with materials that have a lot of life-cycle emissions. That would be an obvious example. I think we will have an adjustment period, and I don’t think there’s a way that issuers immediately can be prepared for that, and we’re trying to incorporate that analysis in all our products, and I know investors are also preparing. There’s just a big challenging period right now where we’re all after more information, but we’re after the relevant type of information. KEITH MULLIN, KM CAPITAL MARKETS: THERE ARE SOME QUESTIONS FROM THE AUDIENCE THAT I WANTED TO THROW OUT: WITHOUT CARBON REDUCTION, NOTIONS OF SUSTAINABILITY ARE FUTILE SHORT-TERMISM. HOW DOES THE PANEL RESPOND TO THIS? Christa Clapp, Cicero Shades of Green: Certainly, we agree, and that’s embedded in the method that we use, Shades of Green, where a dark green rating from us on a bond indicates that the use of proceeds is targeting activities that are generally in line with the Paris Agreement, that is to say across all sectors around net-zero emissions by mid-century. There’s some interpretation around what net-zero means, but that’s the general direction, and we think it’s very important, especially for infrastructure investments that are made today, that we get that alignment right. That’s the bedrock of our approach. When we review sustainability bonds or sustainability-linked bonds, we don’t deviate from that green aspect. We think that climate risk is the most material risk that we know from the science of sustainability aspects, so that’s our number one concern as well. Frank Richter, NRW.Bank: I would agree, as well. Keeping global warming in line with the Paris Accord – for us that means close to 1.5 degrees – is the most relevant target we have