Sustainability's deep roots in a changing world
Susan Barron, London-based global head of sustainable capital markets at Barclays, recently visited Australia to speak with clients on global sustainable finance developments and opportunities. Together with the bank’s Sydney-based head of debt capital markets, Australia and New Zealand, Duncan Beattie, she sat down with KangaNews Sustainable Finance to share the latest on how the environment of 2022 has shaped market evolution.
Are some of the climate events we have seen in recent months – heatwaves in Europe and floods in Australia to name just two – sharpening thinking about sustainability and sustainable finance?
BARRON The climate events we have seen have refocused attention on ESG [environmental, social and governance]. This has not meant the environment alone: the challenge of climate change also increasingly highlights interconnectedness between the environment and social aspects.
My hope is that these events not only create a talking point about ESG but also help further contribute to dialogue about the importance of climate resilience and climate risk assessment, as well as how dedicated ESG financing instruments can be used to improve and address challenges. This also means taking the opportunity to address social aspects, for instance, communities affected by fires and floods.
This would be positive – and we should not lose sight of the fact that calamity can sometimes create an opportunity for positive change.
Have companies and financial institutions maintained their focus on longer-term sustainability even in the challenging conditions of this year?
BARRON The crisis in Ukraine has highlighted challenges from a social perspective. It has made us think about how society and – in a market context more specifically – institutions can provide support.
ICMA [International Capital Market Association], for instance, published guidelines to help guide the market to better understand how the Social Bond Principles can be used to help refugees. This is similar to advice it published at the beginning of the COVID-19 pandemic to highlight ways in which social bonds could be used to provide financial support and solutions to support COVID-19 initiatives.
The energy crisis also creates a double effect and opportunity. On one hand, it has created a platform for debate as to how we can accelerate investment into renewables and other green energy sources. But it has also – in particular as we approach the winter season with higher inflation and rising interest rates, food prices and energy costs – created a discussion about energy security and energy poverty in the context of countries still committed to meeting their climate and net zero commitments.
BEATTIE I don’t believe current circumstances change the end game, though clearly it is a period that needs to be navigated. Cost of living is very relevant, because people are being squeezed in all directions at the moment. But, at the end of the day, climate change is real and needs to be addressed.
Australian financial institutions, for example, are already dealing with the consequences of fires and floods – and this includes the regulatory impact. They have to be mindful of what is happening in the wider world but in a lot of ways current circumstances only reinforce the importance of the ESG aspect.
Progress is still being made despite capital market conditions. I am thinking of steps like Westpac [Banking Corporation] joining the UN-convened Net Zero Banking Alliance. Everyone is aware of the energy security issue but I don’t think there is any less commitment to ESG from the major banks and corporates I speak to.
It has also been a tough year for capital markets and ESG-aligned issuance has suffered as a result. How confident can we be that momentum is not being lost in this difficult environment?
BARRON It is important to remember that we saw significant growth in issuance last year. Credit issuance represented about US$270 billion and overall global ESG issuance was about US$960 billion, according to Dealogic data.
At the beginning of the year, estimates suggested ESG dedicated bond issuance might be in the region of US$1-1.2 trillion. But market volatility has made supply fall across the public sector and the credit space. Estimates at this stage assume ESG issuance globally, across all asset classes, will be broadly similar to 2021 – which is still a significant increase versus 2020.
In the corporate space, ESG volume so far this year is slightly less than over the same period of 2021 – it is down by about 14 per cent. But the percentage contribution of ESG issuance relative to conventional has remained consistent or increased in 2022. The product that has continued to see strong growth is sustainability linked.
Do we believe the growth rate could rise? Most definitely. We are not sure exactly by how much it will increase each year. But it is consistently on an upward trajectory, which can only be positive.
The slowdown in Australian corporate issuance makes it hard to assess a trend, but has sustainability-linked loan (SLL) momentum in offshore markets tipped into sustainability-linked bonds (SLBs)?
BARRON SLL momentum is tipping over into bonds, for a couple of reasons. The LMA [Loan Market Association]’s most recent update of the Sustainability Linked Loan Principles means the product is broadly aligned with the Sustainability Linked Bond Principles (SLBPs) as issuers are encouraged to publish a framework for their loans and recommended to have an SPO [second-party opinion].
These are stronger recommendations than there had previously been and they offer the opportunity for companies to conclude that the two products can be used in a complementary way.
SLBs themselves have evolved very quickly since the first bond was issued in 2019 and the ICMA SLBPs published in June 2020. The acceleration in growth came in 2021, and the six-month gap between the publication of the principles and issuance volume increase is consistent with what we have seen following the publication of new principles for other products.
Because of the significant growth it was, in my view, positive to see the publication of the expanded sustainability-linked Q&A in June 2022. This provided guidance about the discussion on materiality and ambitiousness in KPIs and SPTs [sustainability performance targets]. This is informative for companies exploring the SLL or SLB market.
Importantly, issuers remain focused on their public disclosure – to make sure they are following best practice and to see what they can do to improve it based on the latest industry guidelines. Overall, we are expecting strong SLL and SLB volume.
Is it important for borrowers not only to be ambitious but to be open about the precise nature of their ambition – even if there is a risk of falling short and the associated reputational risk?
BARRON It is multifaceted. Increasingly, in many jurisdictions, regulatory requirements cover mandatory reporting in addition to best practice industry guidelines. But the mandatory requirements can differ by region, of course.
Investors, meanwhile, are demanding more disclosure as they seek to integrate ESG into their decisions. Based on investor surveys we see, ESG disclosure and, increasingly, environmental data and targets are being used in addition to ESG ratings.
The third component is independent review. Various providers will take publicly available information on targets and make an assessment about the level of materiality or ambition – on the assumption that there are sector-based guidelines that can support some type of credible calculation about Paris alignment in the context of environmental targets in particular.
Are global capital markets on a journey toward alignment – so issuers can have a single, unitary sustainable finance framework – or a melange of standards and expectations?
BARRON As a capital markets professional, I hope we will reach a level of consistency. But there may be discussion points along the way. We all want to find a common ‘normal’ but there are different approaches.
We will be monitoring this very closely. The positive I take is that, with all the industry standards or other developing guidelines, there is almost always a period of public consultation. This allows stakeholders to have their viewpoints heard and – hopefully – facilitates what is best for the market.
BEATTIE While desirable, it is not necessary to have the same standards everywhere. For bank capital, by comparison, there is a broad international framework then every country applies its own overlay, depending on individual circumstances. There are pros and cons to this approach. It is harder from a comparability point of view, but it also reflects the fact that every country is different and has its own nuances.
The reality is that what represents ‘enough’ for one jurisdiction in ESG might not be sufficient for another – whether to include nuclear or gas in taxonomies, for example. The point is that this is the subject of international debate with a view to setting baseline standards, off which each jurisdiction can tailor its own rules.
WOMEN IN CAPITAL MARKETS Yearbook 2022
KangaNews's annual yearbook amplifying female voices in the Australian capital market.
KANGANEWS SUSTAINABLE FINANCE H2 2022
KangaNews is proud to share cutting-edge information from the global and Australasian sustainable debt market.