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While bond investors typically aspire to diversification, they often prefer specialisation and specifics when it comes to sustainability impact. Compared to sustainable finance frameworks, which typically include five or more - at times disparate – categories [1], the targeted ESG impact is not always as clearly articulated at issuance. However, an increase in the use of thematic and focused instruments [2] as well as issuers starting to provide more detail about the impact they are aiming for with their GSS bonds helps offering the clarity investors are hoping for.

A case in point is the recent EDF triple tranche green bond. As part of its Initial Price Thoughts (IPT) message, the utility firm disclosed specific project categories from their framework for each tranche – respectively: nuclear power generation, renewables/hydrogen, and electricity transmission.

We expect this approach to be well received by investors and wider market stakeholders who do not want to wait until the allocation reports are published one year later, but instead expect better transparency at issuance. This can avoid situations where buyers of sustainability debt can sometimes feel like a person asking for fruit, being given an apple, and replying: “I really was hoping for an orange”. As borrowers get more specific, investors will find it easier to know at the outset whether they are buying apples or oranges.

What is driving borrowers to be more specific?

Many are swayed by feedback from impact and thematic investors who usually request transparency on the likely nature of the environmental and/or social impact of a bond. When full clarity is not possible, they tend to ask for an initial “hypothesis” around the likely project mix (duly disclosed in relevant offering materials) [3]. The final test of this hypothesis then comes once the allocation and impact report is released.

Such clarity can also signal a borrower’s broader sustainability commitment and credibility. Rather than pointing to a (long) list of possible project categories, the issuer can speak tangibly about sustainability projects they intend to pursue.

Improved mandatory disclosure also helps. For instance, for many European issuers conducting EU Taxonomy reporting, it is a helpful catalyst of green project specification as it requires them to segment capital expenditure into green and non-green components (based on the respective Taxonomy definitions), which can support projections necessary for future green bond project pools. Additionally, the EU Green Bond Standard will ask issuers for details on the intended allocation of bond proceeds in the pre-issuance factsheets [4].

Many treasury teams may be reluctant to give too much forward-looking information of this sort. What if there is a clear delta with how green financing is actually spent? Business profiles and investment plans evolve, so this may well occur. We are, however, finding that the sustainable finance market is quite tolerant of changes in ESG trajectory when clearly explained and contextualised.

Key is to have a clear rationale. A focused narrative at issuance and at time of the first allocation report.

 

  1. NatWest GSS Bond Database
  2. NatWest ESG Investor Database
  3. NatWest ESG Question Database
  4. EUR-LEX  Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on European green bonds

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