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Ditch the pure-plays, bring on the polluters
Time the bond market financed some serious ESG impact
18 Dec 2020 | Keith Mullin
Keith Mullin
Keith Mullin

Was it just me, or was the climate transition finance guidance we got recently from the Green and Social Bond Principles a little, well, feeble and rather passé? Given that the handbook containing the guidance was intended to get polluters issuing more labelled environment, social and governance (ESG) bonds. I guess, I shouldn’t be too mean. But still…

In summary, climate transition strategies (including targets and pathways) should be science-based, we’re told. OK. The handbook also offered some pointers to implementation transparency and business-model environmental materiality (ESG folk do so love their materiality). It shies away from providing definitions or project taxonomies, deferring to efforts already underway elsewhere in this area.

I did love the bit where the Climate Transition Finance Working Group found – without a hint of irony – that issuers from carbon-intensive sectors were “hesitant to access the Green Bond market despite their importance to the climate transition”. I’m not surprised given the wholly counter-productive and self-righteous over-reactions the few issuers from those sectors that have tried to demonstrate their ESG commitments in labelled format have received from almost all corners of the market.

I’ve always believed the labelled ESG bond and loan markets should be driven by corporate polluters looking to finance formal climate-change pathways away from the huge emissions embedded in their balance sheets. And not by pure-play issuers or even sovereigns, which don’t really need to label their issuance at all. I’m not even sure what labelling in these cases actually proves.

Greenhouse gas emissions savings in such cases are certainly less impactful, and a key driver of labelled issuance is (at least for some) as much a means to enfranchise tick-box ESG investors while achieving better execution in the capital markets as it is a sign of substantial future climate-change or social impact.

The International Capital Market Association tells us the handbook was the work of people from a bus load of institutions. Far be it from me to naysay such an undertaking, but wasn’t the guidance really just stating the obvious? Dare I even wonder if the Principles committees aren’t trying too hard to justify their own place in an area of the capital markets that is rapidly being usurped by formal taxonomies and legal requirements from governments building net-zero carbon pathways?

When all’s said and done, another set of best-efforts voluntary guidelines just seems unfit for purpose, given the direction of travel and the urgency to force issuers to contribute meaningfully to meeting global climate change targets.

On a tangential point but a point germane to the notion of setting the bar high to force meaningful contributions to ESG transition, the pained and shocked reactions I read in the media from bankers in reaction to the EU taxonomy’s classification of sustainable housing as stock only with the highest environmental certification were typically overdone, misplaced and (as ever) all about them. The issue is, setting the bar so high will put most existing green mortgages and the bonds refinancing them environmentally off-side. But by the same token, weak standards get us nowhere. Time for change.

Back to the transition guidance, we did get a suggested disclosure and transparency blueprint (based on the Task Force on Climate-related Financial Disclosures or similar frameworks) for polluters wanting to whack an ESG label on their debt funding as a purposeful and explicit sign of a formal commitment to implement ‘just transition’ and reduce climate-change risk in their core businesses. And at a magnitude and speed consistent with meeting Paris agreement or net-zero carbon targets.

We’re told a key is creating transition commitments and practices that are credible. And that the internal allocation of capital to implement transition strategies is the most important factor (alongside the governance supporting capital re-allocation). Issuers should therefore transparent be about planned capital and opex decisions that will deliver proposed transition strategies. All worthy but …

Ending on a plus-point, just in case you thought green bonds and their principles, social bonds and their principles, sustainability-linked bonds and theirs, sustainability bonds and their guidelines, not to mention green and sustainability-linked loans and their principles were already too much, the latest guidance isn’t seeking to introduce transition bonds as yet another sub-set in an already fragmented ESG-labelled bond market.

We’re mercifully told that issuers can use existing labels to align their financing strategies with their climate transition strategies and decarbonisation trajectories. Phew!