• The UK Government publishes its new Green Finance Strategy. The UK Government’s newly published Green Finance Strategy (‘the Strategy’) outlines measures to unlock finance for nature and is aimed at helping the UK reach its goal of becoming the world’s first ‘net zero financial centre’. This Strategy has been published as part of a wider set of green announcements released on 30th March 2023, referred to by media outlets as UK ‘Green Day’. Notable updates within the Strategy include: (i) a further delay to the release of the UK Green Taxonomy; (ii) the launch of a transition market review; (iii) the introduction of two new advisory groups on sustainability reporting standards; (iv) further guidance on scope 3 emissions; (v) plans to grow the green finance workforce; and (vi) the launch of consultations on transition plans. The reaction to the Strategy by industry bodies has varied, with the Green Finance Institute and the UK Sustainable Investment and Finance Association (UKSIF) responding positively and welcoming the direction and clarity. On the other hand, Positive Money and ShareAction have expressed concerns that the steps outlined in the Strategy aren’t sufficiently ambitious.
• Biden uses first veto to defend rule on ESG investing. US President Joe Biden has used the first veto of his presidency to reject a Republican proposal to overturn a Department of Labour rule allowing pension fund managers to consider ESG issues for investments and shareholder rights decisions. The final rule, which covers plans that collectively invest $12 trillion on behalf of 150 million Americans, was announced in November and had been welcomed by investors including Legal and General Investment Management and the American Retirement Association. Following the announcement of the veto, the White House released a message to the House of Representatives, countering claims that the rule would lead fund managers to sacrifice financial returns; Biden added that the Republican-led resolution “would prevent retirement plan fiduciaries from taking into account ESG factors that could affect investment returns”.
• European Commission proposes green claims rules to protect consumers from greenwashing. The European Commission has unveiled the proposed “Directive on Green Claims” aimed at protecting consumers from greenwashing. This constitutes a new set of rules mandating minimum requirements for businesses to substantiate, communicate and independently verify their environmental claims and labels, which will need to be proven with scientific evidence. According to the Commission, the new rules address a need for reliable and verifiable information for consumers, in light of a recent study by the Commission finding that more than half of green claims by companies in the EU were vague or misleading, and 40% were completely unsubstantiated. Areas targeted by the new rules include explicit claims made by companies such as “packaging made of 30% recycled plastic” or “ocean-friendly sunscreen”, covering all voluntary claims about environmental impact alongside aspects or performance of products, services or the business itself.
• US Republicans challenge more asset managers on ESG. Republican attorney generals from 21 US states have raised new concerns with asset managers over their consideration of ESG factors; via a letter provided by the office of Montana Attorney General Knudsen, sent to 53 of the largest US fund firms. These include BlackRock and the asset management arms of State Street Corp and JPMorgan. In the letter, dated 30th March, the attorney generals told the asset managers that they had “taken actions inconsistent with (their) clients’ financial interests” by joining groups such as the Net Zero Asset Managers initiative (NZAMI); in contrast, asset managers have argued that membership of these groups aligns with their fiduciary obligations.

Reporting: CDP reports that business nature disclosure still lags behind climate

The Carbon Disclosure Project (CDP) Global Supply Chain Report 2022 has revealed that while climate reporting has improved with a 42% year-on-year increase, nature-related (on biodiversity, forest and water) and Scope 3 disclosures remain relatively under reported, with almost 60% of companies not disclosing any supply chain emissions. CDP warns that, unless the volume and quality of nature-related and supply chain emissions disclosures increase, businesses will not be prepared for upcoming regulatory changes.

180 countries have committed to imposing nature-related reporting on larger companies by the end of the decade and to tightening Scope 3 disclosure requirements across various markets. Meanwhile, CDP is advocating for businesses to ensure that nature-related disclosures are a board-level priority and to start engaging suppliers on nature in a more meaningful manner. 

Reporting: TNFD releases final draft of nature-related disclosure framework

The Taskforce on Nature-related Financial Disclosures (TNFD) has released its final draft framework to better inform corporate approaches to reporting as well as action towards nature-related risks. TNFD’s final publication, based on feedback gathered on the final draft and pilot testing to be conducted, is set to be released in September 2023 following a 60-day consultation process. Updates to the framework include: the adaptation of the definition of Scope 1, 2 and 3 emissions to the context of nature-related terminology (“direct, upstream, downstream and financed”); new draft guidance on the use of scenario analysis for nature-related issues; and draft guidance for four sectors (Agriculture & Food; Mining & Metals; Energy; and Financial Institutions).

Ratings and data: MSCI to downgrade and remove ETF ESG ratings on a large scale

ESG rating provider MSCI is set to tighten its criteria for what qualifies as an ESG-compliant fund, with the expectation that numerous European exchange-traded funds (ETFs) will have their ESG rating removed or downgraded.

According to BlackRock’s iShares arm (the world’s largest ETF provider), the number of ‘A’-rated European ETFs may fall drastically from 1,120 to ~50, whereas that of ETFs without an ESG rating might increase significantly from 24 to over 450. The new changes are expected to result in all synthetic swap-based ETFs losing their ESG ratings.

MSCI has not yet published the scale of downgrades but has stated that its changes “will lead to fewer funds being rated as triple or double-A” and, importantly, “will reduce the volatility in ESG fund ratings”.

Ratings and data: FCA raises greenwashing risk concerns over ESG benchmark failings

Following a preliminary review on benchmarks for ESG investment products, the Financial Conduct Authority (FCA) found that providers issued ESG-related disclosures of “poor” quality and “had failed to implement their ESG methodologies correctly”, thereby increasing the risk of greenwashing allegations. The FCA has warned that it is prepared to take potential enforcement action if the issues identified are not addressed in a timely manner. Given current supervisory findings indicating the “potential for widespread failings”, the FCA promises to do more work in this area, noting that providers will be subject to its proposed Sustainability Disclosure Rules aimed at tackling greenwashing, set to be finalised and published by H1 2023.

Primary Market

Landsec, Severn Trent and United Utilities tapped the GBP market. UK issuers have availed of favourable market conditions to bring Use of Proceeds transactions to the GBP market, including debut issuers. 

• Landsec issued an inaugural £400m 9.5yr Green bond from their recently updated Green Finance Framework.
• Severn Trent issued a £300m 13yr Sustainability bond, with proceeds to support their ‘Green Recovery’ projects.
• United Utilities issued a long-15yr £300m Sustainability bond, which saw broad support across UK and EU geographies.

Wessex Water, sustainability bond. Wessex Water debuted its long 9yr £300m sustainability bond. The transaction represents the Wessex’s first deal from their new Sustainable Finance Framework and follows other UK issuers launching new sustainability transactions in the GSS market in 2023. DNV has provided a Second Party Opinion confirming the alignment of the Framework with the International Capital Markets Association’s (ICMA) principles.

Volkswagen, dual-tranche green bond. Volkswagen issued a €1.75bn green dual-tranche Green Bond. The Green Finance Framework includes one project category, ‘Clean’ transportation which is aligned to EU Taxonomy activity 3.3 and supports the UN sustainable development goals (SDG) 9.1, 9.5, 11.6 & 13.1. This new dual tranche was also their first transaction post the MSCI controversy flag assigned to VW.

Nexans, sustainability-linked bond (SLB). Nexans priced a 5-year €400 million sustainability-linked bond. Inaugural SLB includes both KPIs from the framework (1) Reduce absolute Scope 1 and 2 and (2) Reduce absolute “Cradle-to-shelf” Scope 3. +50bps paid at redemption if one or both targets are failed on Dec 2026.

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.

ICVCM launches Core Carbon Principles and Program-Level Assessment Framework

The Integrity Council for the Voluntary Carbon Market (ICVCM) has released its Core Carbon Principles (CCPs) and Program-level Assessment Framework to set high standards for sustainable development and disclosure of high-integrity carbon credits. These principles and framework were created with inputs from several organisations in the voluntary carbon market, and the ICVCM has established criteria to evaluate whether carbon-crediting programs are CCP-Eligible.

The framework emphasises transparency and requires programs to provide comprehensive information to all stakeholders on the impact of projects issuing CCP-labelled carbon credits on society, the environment, and emissions.

ESG funds targeting biodiversity protection experience 15% asset growth in two months

The ESG fund industry is witnessing a boom in funds targeting biodiversity protection, with assets growing by 15% in just two months. This growth has been fuelled by a 150% increase in the number of funds offering such strategies in 2022, following the COP15 conference. Although there is a lack of standardised data in this emerging ESG market, fund managers have managed to attract investors by focusing on the important goal of biodiversity conservation.

Allianz Global Investors launches Sustainability Insights Engine to simplify ESG data

Allianz Global Investors has launched the Sustainability Insights Engine, a data platform aimed at simplifying ESG data by consolidating information from various sources into one comprehensive data set. The platform compiles data from external providers and AllianzGI's own input, which is then processed and standardised into a single data set.

Federated Hermes launches Sustainable Global Investment Grade Credit Fund

Investment manager Federated Hermes has unveiled its new Federated Hermes Sustainable Global Investment Grade Credit Fund, which seeks to generate a total return while reducing its environmental footprint, including carbon, water, and waste. The fund complies with Article 9 of the EU's Sustainable Finance Disclosure Regulation (SFDR) and has sustainability-focused investment manager CCLA as a cornerstone investor.

ECB slowly reduces carbon footprint of its €385bn corporate bonds

A recent European Central Bank (ECB) report showed that the reduction in purchases is slowing its progress in decreasing the carbon intensity of its €385 billion portfolio of corporate bonds.

In its first such disclosure, the ECB reported that the carbon intensity of its new purchases of corporate credit (a measure that links a company's emissions to its revenues and the size of the investment) had reduced by 65% since the central bank adopted a "green tilt" in picking bonds late in 2022. As such, the weighted-average carbon intensity of the purchase flows in Q4 2022 stood at ~200 tonnes of CO2 per million in revenue generated by the company, compared to ~400 tonnes in the first three quarters.

While this provides encouraging information of the tilting framework’s potential, it is expected that the new, greener purchases will take some time to have a substantial impact on the existing portfolio’s overall carbon metrics, in light of the ECB’s decreased bond-buying activities.

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

• As easy as PAI?
• How the fashion industry can become more sustainable
• Mayor Tracy Brabin joins local business leaders to support region’s ethnic minority business
• Transitioning the Agriculture Ecosystem

For the full monthly newsletter login to Agile Markets. Don’t have access? Contact us here.

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

• Dr Arthur Krebbers, Head of Corporate Climate and ESG Capital Markets 
• Gustavo Brianza, Head of Debt & ESG Advisory
• Daniel Bressler, Climate and ESG Capital Markets
• James Lander, Credit Trader
• Philippe Bradshaw, Head of European Syndicate
• Rui Zu, ESG Advisory
• Thomas Gidman, ESG Advisory
• Dean Shahfar, Sustainable Finance UK
• Pietro Stimamiglio, Climate and ESG Capital Markets 
• Niceasia Mc Perry, Climate and ESG Capital Markets

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