ECB climate stress test: banks are overexposed and underprepared for climate risk

• The ECB launched the stress test at the beginning of 2022, defining it as “a learning exercise for banks and supervisors alike”; it sought to assess banks’ preparedness for dealing with potential shocks from climate risk
• The results indicate that, of the 104 participating banks, almost two thirds do not yet incorporate climate risk considerations into their stress testing frameworks
• Furthermore, around 60% of the banks’ income from non-financial corporate customers is currently earned from sectors deemed greenhouse gas-intensive, well above the relative weight of these industries in the EU economy – read more

Last minute US Senate deal set to potentially unlock $370 billion for climate action

• A surprise deal has been struck between US Senator Joe Manchin and Democratic Senate Majority Leader Chuck Schumer, which could unlock almost $370 billion in investment for energy security, renewable energy and climate-focused initiatives that had previously been jeopardised by political impasse
• However, there are a number of fairly significant hurdles which Democrats will need to overcome before President Biden can enact the legislation. As they intend to muscle the package through budget reconciliation, they must receive the Senate’s blessing under the Byrd Rule, as described by the NY Times. In addition, the Senate, prior to voting on final passage, will have to sit through a 20-hour debate and the so-called vote-a-rama, before the measure returns to the House of Representatives for the final vote – read more
• Among the climate and energy-focused elements of the proposed legislation are measures to support climate solutions to decarbonise industry, reduce the cost of renewable energy for consumers and invest in mitigation and climate resilience projects in deprived communities
• As part of the package, over $60 billion will be allocated to accelerate US manufacturing of green energy and transportation technologies, more than $20 billion will go towards climate-smart agriculture practices and over $60 billion will focus on ‘environmental justice priorities’ to funnel funding into disadvantaged communities. This deal is a significant boost for Biden’s previously stalled climate agenda – read more

EU puts key plank of ESG rulebook on hold amid infighting

• As reported by Bloomberg, the next milestone in the EU’s efforts to create a global benchmark for ESG investing has been indefinitely put on hold. The so-called social taxonomy was supposed to be the next building block of the EU’s guidebook, but is unlikely to see the light of day before the current commission ends its term in 2024, according to people familiar with the matter
• Industry experts have suggested that, whilst the Commission hasn’t yet taken a clear stance, progress is extremely unlikely to be made; as a result, gender equality and exploitation-free supply chains won’t be enshrined in EU ESG regulations until the latter half of the decade – read more

UK Government given eight months to turn around ‘unlawful’ net-zero strategy

• According to the High Court, the UK Government’s ‘Net-Zero Strategy for 2050’ breaches the Climate Change Act, as it does not adequately demonstrate how key emission reduction targets will be reached. This news comes just after the Government announced its ‘Jet Zero’ strategy to reach net-zero domestic aviation and airports by 2050 and 2040, respectively – read more
• On the back of cases brought forward by environmental and legal campaign groups, the court found that the strategy, published in October 2021, omitted vital elements, namely “the quantitative effects of individual policies” alongside the qualitative details on policies relied upon to cover a 5% shortfall disclosed in the most recent carbon budget (how much greenhouse gas the UK can emit from 2033 to 2037)
• As a result, the Department for Business, Energy and Industrial Strategy (BEIS) must publish an updated report by the end of March 2023 to address the concerns raised. The BEIS has assured that the case is not a challenge to the strategy but rather “about the level of analysis published” – read more

Reporting: ESG reports shouldn’t be a replacement for real sustainability

• In one of its latest ESG-related publications, the Harvard Business Review (HBR) has suggested corporate leaders are receiving contrasting feedback on the need for ESG reporting, amidst an unfavourable environment in which a segment of politicians has attacked the ESG agenda and the Securities & Exchange Commission has sought to crack down on instances of greenwashing
• While more scrutiny of ESG is necessary, corporate leaders and investors who focus exclusively on ESG disclosure are missing the point, according to HBR. “There’s a big difference between a company that has a chemicals management policy, and one that has a bio-based dye that reduces waste and water use”
• In order to gain a competitive edge, strategy and culture ought to be looked at first, with reporting metrics being the last step. The same applies to sustainability, says HBR – read more

Reporting: asset owners want ISSB to go further with global climate framework

• In its response to a consultation request from the International Sustainability Standards Board (ISSB) regarding its April 2022 draft on climate-related disclosures, the UN-convened Net Zero Asset Owners Alliance (NZAOA) has called for stricter standards
• The NZAOA strongly welcomed the ISSB – the international baseline on climate disclosures – taking action on this issue. However, it suggested, inter alia: the inclusion of further disclosure requirements regarding transition plans; the integration of climate scenario analysis into company reporting; and the introduction of a common target-setting template
• The feedback will be reviewed by the ISSB in the second half of 2022 and release of the new standards is targeted for year end, which will give corporates globally a standardised framework to follow – read more

Reporting: GRESB’s new SFDR reporting solution allows real estate managers to solve the hardest part of reporting with real data

• A new product has been launched by GRESB designed to help Real Estate managers with Article 8 and Article 9 funds. The Sustainable Finance Disclosure Regulation reporting solution for real estate helps report on product- and entity-level ESG practices – read more

Ratings & Data: Moody’s expands ESG credit impact scores to cover healthcare, agriculture, transport and logistics companies

• Moody’s has expanded its ESG profile and credit impact scores service, one of the four pillars of the company’s ESG solutions offering, alongside Second Party Opinions (SPOs) and “ESG measures”. Having initially launched the scores in January 2021 focusing on sovereign issuers, the company has increased its coverage over several months, adding numerous sectors as well as countries
• Moody’s scores integrate ESG considerations into companies’ credit analysis, including each entity’s risk exposure and the degree of credit impact. Its reports include two types of ESG scores: issuer profile scores (IPS) and credit impact scores (CIS). IPS measure issuers’ exposure to ESG considerations that could be material to credit risk, while CIS gauge the impact those ESG considerations have on an issuer’s credit rating
• For healthcare services and agriculture companies, ESG considerations have a moderately negative credit impact overall driven by social risks such as human capital and supply chain issues – read more

Ratings & Data: return of coal a threat to European companies’ ESG ratings, according to Reuters

• European companies who are turning to coal as an alternative to Russian gas face a hit to their ESG ratings. “When your emissions go up, all other things being equal, you are in more trouble from a ratings perspective”, according to an executive director at MSCI
• Nevertheless, Germany and Italy, amongst others, are considering burning more coal due to the lack of alternatives, an approach that some industry participants view “as necessary and pragmatic”
• However, corporates such as RWE and Aurubis have confirmed that they intend to continue decarbonising, despite the short-term complications such an approach will entail. Similarly, several major European investors are maintaining commitments on achieving net-zero targets – read more

Primary market

SSE (Baa1/ BBB+) – Green Bond

• SSE issued a 7yr €650m green bond
• SSE have raised around £1.9bn equivalent under their green bond framework to date, making them the largest issuer of green bonds in the UK corporate sector
• The net proceeds of this issuance will be applied exclusively to finance or refinance, in whole or in part, green projects which meet the eligibility criteria as set out in the SSE Green Bond Framework
• Examples of projects identified include: renewable energy production – including wind farms, offshore equity investment and onshore investments and investments in transmission network infrastructure
• DNV has provided a Second Party Opinion on the framework, confirming alignment with the International Capital Market Association (ICMA) principles and guidelines.

Church Commissioners for England (Aa1) – Sustainability Bond

• The Church Commissioners for England issued a 10yr £250 million Sustainability tranche alongside a £300 million conventional bond with a 30-year maturity
• Net proceeds of the offering will be used by the Church Commissioners to further its non-profit making activities in line with its existing investment policies and to finance eligible sustainable investments (through eligible investment managers) in accordance with the Church Commissioners for England’s Sustainable Financing Framework from June 2022
• Broad range of investment categories: renewable energy, clean transportation, sustainable land use, sustainable water and wastewater management, pollution prevention and control, energy efficiency, green buildings, climate change adaptation, access to essential services, affordable housing, employment generation

Saint-Gobain (Baa1/BBB) – Sustainability-linked bond

• Saint-Gobain launched a triple-tranche €1.5 billion sustainability-linked bond under its newly-established Sustainability Financing Framework
• The framework includes three environmental KPIs (i.e. Scope 1 & 2, Scope 3, % of non-recovered production waste) and a social KPI (i.e. frequency rate of accidents) all with 2030 targets. ISS ESG provided the Second Party Opinion report

Secondary market

For further analysis and information on the Secondary Market, please take a look at the full monthly newsletter on Agile Markets. If you do not have access to Agile Markets, please contact us here.

Despite global economic volatility, carbon markets remain ‘stable and growing’

Despite the recent global economic volatility seen in the first half of 2022, carbon credits have managed to outperform expectations. Carbon markets have remained relatively resilient during the first half of 2022 which indicates that the voluntary carbon market is becoming more mature and sophisticated – read more

KKR to launch two ESG credit funds

An internal memo seen by Reuters has revealed that KKR & Co Inc. is expecting to launch its two credit funds dedicated to investing based on environmental, social and corporate governance (ESG) principles later this year. The funds will be available to institutional investors and high net-worth individuals. The focus of the first fund will be on climate change whereas the second will be a global sustainability-focused fund deploying a range of private debt investing strategies – read more

NNIP launched a new social bond fund

NN Investment Partners has launched a new social bond fund as the asset manager sees increased issuance of social bonds. The fund will invest in social- and sustainability bonds that allocate proceeds to projects that promote social benefits. To be selected, bonds must allocate at least half of the proceeds to social projects – read more

Insight has a classification system for SLBs

Insight Investment has an assessment framework for sustainability-linked bonds. Under Insight’s framework, SLBs will be given two ratings – (1) one reflecting its sustainability credentials and (2) the other its structure and incentive. To be considered suitable for inclusion in Insight’s impact allocations the minimum criteria for both the sustainability criteria and bond structure and incentive must be met. An overall red, light green or dark green rating is assigned, with both light green and dark green status designating suitability for investment – read more

Regular articles from us on market-moving themes, and updates on what we are doing to further our ESG commitment.

Replay: What ESG Investors Want webinar – The ‘S’ of ESG
NatWest’s 12th webinar in its “What ESG investors want” series offered an insight into ESG investors’ thinking when identifying social bonds for their investment portfolio.

Article: Tobacco in the spotlight: what does more stringent regulation mean for investors?
In this article, we take a look at the ESG issues linked to tobacco companies, new regulations in the US and the implications for investors

Article: Sustainability-Linked Bond Watch Note: Q2 2022
Sustainability-Linked Bond (“SLBs”) issuance continues to show good momentum, achieving another record first-half year with volumes reaching around EUR 50 billion, an increase of 15.5% year-on-year.

Article: GlobalCapital Bond Awards 2022: Most Impressive Bank for Corporate Green and ESG-Linked Bond
NatWest is honoured to have won the “Most Impressive Investment Bank for Corporate Green and ESG-Linked Bonds” as well as the “Most Impressive FIG House in Sterling” in the 2022 Global Capital Bond Awards.

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Or, for Corporates looking to discuss any of the above further, please reach out to our authors:

• Dr Arthur Krebbers, Head of Sustainable Finance, Corporates
• Gustavo Brianza, Head of Ratings & ESG Advisory
• Daniel Bressler, Vice President Sustainable Finance, Corporates
• Darren Hook, Head of IG Corporates Research
• Philippe Bradshaw, Head of IG Syndicate
• Helen Ferguson, ESG Advisory
• Thomas Gidman, Vice President ESG Advisory
• Dean Shahfar, Sustainable Finance Corporates
• Pietro Stimamiglio, Sustainable Finance Corporates
• Niceasia Mc Perry, Sustainable Finance Corporates

*For any unfamiliar terms used within this article please refer to our Insights glossary.