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Sustainability

What next for sustainable commercial paper?

A holistic approach from issuers

A decision to opt for sustainable CP should not be considered in isolation – which has been a constraining factor for some market participants. For issuers, it should be seen as “one part of the puzzle” of aligning your treasury strategy with your key sustainability objectives. More issuers taking this type of holistic approach, for instance through a single framework, should improve its appeal and credibility.

Economic impact of adding a sustainability label

Whereas the “greenium” has become an established topic in the public bond market, it is less straightforward to apply to commercial paper (no secondary trading, less clear points etc.). The emphasis has therefore shifted towards the market access benefits from issuing sustainability-labelled CP. Amidst an ongoing growth in ESG-focused money market funds – there are currently 244 such funds with over EUR 1.5tn in AUM (Source: Bloomberg) – and the resulting demand-supply imbalance, these remain pronounced: attaching an ESG label to your commercial paper programme will likely continue to “open doors” to new investors.

The need for greater transparency

There is currently a lack of credible data on the sustainable CP market, necessitating investors to undertake a significant amount of manual (and hence time consuming) analysis, so there is an important role here for data providers. In an era of enhanced scrutiny of sustainability claims, investors should be able to readily assess what portion of their portfolio is ESG-labelled and what types of projects they are supporting – amongst other informational needs. It has been suggested that the emergence of the sustainable CP market may even help improve the transparency of the CP market as a whole.

Structural evolution of KPI-linked CP

The products with the least clear market consensus in this asset class have been key performance indicator (KPI)-linked CP. There are, broadly speaking, two structures, differing in their consequences in the case of not achieving the KPIs:

1.      Failing to meet a sustainability target has a reputational effect through having to make a public admission to your investors and wider stakeholders.

2.      Failing to meet a sustainability target leads to a payout towards a predetermined charity (typically a portion of cumulative CP issued).

These two approaches are likely to exist in parallel for some time as the market evolves. They may also be applicable towards different types of issuers: for example, large capital market issuers (who might also have sustainability-linked bonds outstanding) may consider the ‘investor relations effect’ sufficiently material.

 

By our count, there are currently 35 sustainable CP programmes. Further growth could be self-reinforcing – with more issuance improving the breadth of the asset class which could trigger greater investor interest and in turn might encourage more issuers. These lively debates suggest there are not only real challenges to tackle but also a willingness to make this happen.

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