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Author: Don Obrien

Sustainable Finance is Going Mainstream: Here’s How You Need to be Prepared for Investor-Led Change | Vinson & Elkins LLP


It can sometimes be hard to track what’s happening in the world of “green investing” as the number of announcements and initiatives on environmental, social and governance (ESG) and sustainable finance have been accelerating in the last six months.

One of the latest came in June from the G7 Summit. Leaders committed not only to “embed[ding] climate change and biodiversity loss considerations into economic and financial decision-making,” but also emphasized the need to “green the global financial system so that financial decisions take climate considerations into account.”

The rhetoric is being backed up by action, too. In July 2021 the European Commission unveiled an ambitious strategy to help improve the flow of money towards financing the transition towards a sustainable economy.

Asset managers are divesting from companies that do not meet their sustainability criteria, while central banks have widely incorporated climate change risks as part of central banking discussions.

According to data from BloombergNEF (BNEF), sustainable debt has now surpassed $3 trillion borrowed for ESG purposes.

More than 17 per cent of all the bonds issued in June were labelled as being some flavor of social, sustainable or green, according to research from Bank of America.

Yet this is not merely being driven in a top-down fashion by policymakers and actors like financial institutions and corporates – which may lead one to be skeptical or think that it will all have immediate, real-world impact. The effort is also being driven by investors – and the impact is proving to be greater than many had initially believed.

According to Bloomberg Green, almost every major activity in sustainability is above last year’s trend lines: financial markets are issuing more sustainable debt and investors are putting more money into ESG-themed exchange-traded funds.

The global sustainable bond market is another outperformer. After just six months, more ESG-related bonds were issued than in all of 2020. And while the sector still represents a fraction of the overall bond market, it is quickly gaining ground, with sovereign investors and others required to account for a certain percentage of their funds going into green bonds.

How should you get started in engaging with this? We think there are three steps that organizations need to take:

Have your ESG ducks in a row

If you’re going to be out in the market receiving ESG investor dollars, you need to have a documented ESG strategy in place, not developing one at the same time that you’re trying to issue debt and draft disclosure around your ESG strategy and policies. For example, businesses that want to issue green bonds should closely coordinate with internal departments on their ESG policy so they can articulate their positioning to all stakeholders (without greenwashing their strategy). Failing to do so can pose reputational risks, as well as enforcement risks in certain contexts.

Understand the ESG goals and sensitivities of your existing and targeted investors

If you want to attract investors who share the long-term vision of the company – those whose interests are aligned with those of the issuer, and therefore to your debt issuance — understanding what they will be looking for is critical. For instance, if you are looking to attract a particular suite of investors and you know that it’s important to their fund that they can point to carbon emission reductions, then it probably makes sense to put your carbon emission reduction strategy at the front of your debt issuance.

Transparency, reporting and verification

Ensure that you have the appropriate internal reporting programs and external verification processes set up if possible, and provide this information to your stakeholders. Doing so helps to prepare a company for the biggest investor sensitivity in the area: avoiding greenwashing.

To be sure, this is not going to be a straightforward exercise. For one thing, the taxonomy of sustainability – the rules of the road – is an alphabet soup of acronyms and developing standards (TCFD etc.). And part of the reason for the confusion is that investors, asset managers, and issuers have yet to adopt common definitions of ESG.

But progress is being made. A year ago, five leading independent standard-setters said they would work together towards a comprehensive corporate ESG reporting system. Earlier this year, rules came into effect in Europe to make financial firms and investors disclose that they have considered sustainability risks, as well as how they are taking adverse effects into account. Next up, in time for the UN’s COP26 summit in November, there are expectations that the IFRS Foundation will launch a global Sustainability Standards Board.

But it’s also worth remembering that, elsewhere, a lack of common standards has not prevented the functioning of the underlying systems and approaches they are designed to guide and underpin: we have US GAAP and IFRS accounting standards in the auditing world, after all.

As more investors are using ESG criteria to drive decisions on whether they are in, or out, of a deal, this will only drive demand. Are you ready?

First published on Nasdaq.com, September 27, 2021



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Oliver Bolt

Oliver Bolt

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