Special Report
A special report is content that is edited and produced by the special reports unit within The Irish Times Content Studio. It is supported by advertisers who may contribute to the report but do not have editorial control.

Market looks more and more to sustainable financing

Environmental, social and governance compliance key to investment funds and structures

Europe is leading the way in sustainable financing with European issuers taking a 62 per cent market share in Q1 2021 according to data from Refinitiv, the American-British global provider of financial market data and infrastructure. Within Europe some markets are definitely more advanced, France for example being particularly strong, while Ireland is behind but catching up fast.

Green Finance Special Report looks at all aspects of the market from green loans to green securitisation, and warns consumers and investors to beware of greenwashing by fund managers, financial institutions and brokers.

Over the past 12-18 months, green and sustainability-linked financing has been one of the main topics of conversation between market participants. David O'Mahony, a partner at the finance and capital markets department at Matheson has witnessed this trend.

“Huge strides have been made in terms of approach, knowledge and expertise over this period. I would expect this to continue into the future to the extent that borrowers who do not have some form of green borrowing or a sustainability-linked element to their loan facilities will be outliers in the market.”

Waystone, a provider of governance risk and compliance services to help asset managers establish funds and investment structures, is ideally placed to view the changes in the marketplace.

“So particularly within the EU, these changes are mandated,” says Jason Poonoosamy, deputy chief executive officer at Waystone.

“In particular, the sustainable finance disclosure regulation or FDR, aims to make more transparent and consistent the disclosures that investment managers or product manufacturers are making about themselves and their products.”

This regulation introduces transparency into fund claims. If a company is not ESG-compliant (environmental, social and governance), they actually need to state this fact on their website and in other documents.

“It’s a form of name and shame,” says Poomoosamy. “It came as a consequence from the Paris Agreement in 2016 and while it has taken some time to be passed into law in March of this year, it is also positively impacting other jurisdictions such as North America and the SEC regulatory body.”

Greenhouse gas

The Paris Agreement aims to substantially reduce global greenhouse gas emissions to limit the global temperature increase in this century to 2 degrees above pre-industrial levels, while pursuing the means to limit the increase to 1.5 degrees.

It is seen that access to finance can be a key enabler of all economic activity, and sustainable finance promotes the inclusion of ESG considerations, helping to channel capital towards sustainable economic activities and projects.

Alan Duffy, chief executive and head of banking at HSBC Ireland, talks of other regulations bringing green considerations to bear on finance: "There are a multitude of legal and regulatory changes coming down the tracks which are having an impact on how issuers, investors and financial institutions look at sustainable finance. The EU is leading the way with landmark regulation such as the EU taxonomy which is a classification system established to clarify which investments are environmentally sustainable.

“Another key EU regulation is the recently proposed corporate sustainability reporting directive (CSRD) which will require companies to produce a consistent and readily comparable set of periodic sustainability information which will be available to banks, asset managers, investors, regulators and other key stakeholders including NGOs and the general public.

“Closer to home, the Government is due to publish details of its ambitious climate action plan in the coming weeks which commits to a 51 per cent reduction in carbon emissions by 2030 and will have a profound impact across every industry,” says Duffy.

These regulations are important to provide clarity on what constitutes ESG-compliant finance and also to avoid possible greenwashing, where companies may overhype or mislead investors on their sustainable governance.

O’Mahony has been speaking with market participants on both the borrower and lender side and believes there is not a systemic problem in relation to greenwashing.

Perceived greenwashing

“Notwithstanding that, lenders are very anxious to ensure that there is no actual or perceived greenwashing. There are useful industry guidelines that both lenders and borrowers can follow, eg the loan market association have published guidelines in relation to green loans and sustainability-linked loans,” he says.

As capital follows the green model, increasingly competing companies are looking to differentiate themselves along green lines.

Poomoosamy reflects that it’s not just the case of their status, but how they conform to the individual jurisdictions and their local regulations.

“If you’re a green company, and you’re doing something that’s beneficial, you can’t at the same time be doing something that’s harming the environment. This is called the principle of least harm or the principle of no harm, so you can’t offset one activity with another. The goal is to make sure companies are completely green all the way through.”

Duffy argues that the cost of moving to a decarbonised world is less than the cost of doing nothing.

“It is very difficult to estimate how much the move to a sustainable economy will cost. Suffice to say it will most certainly be in the tens of trillions of dollars. However, rather than see it as a cost, we view the move to a decarbonised society as a generational investment opportunity. The recently published and widely quoted IPCC Climate Change report made it abundantly clear that the cost of doing nothing is of far greater concern.

“The pace of adoption has increased rapidly and the momentum behind sustainable finance is really building. An all-time quarterly record of almost $290 billion in sustainable finance bonds were raised in the first three months of 2021, more than double the levels seen a year before. Full-year issuance is set to easily surpass $1 trillion and, with more products being developed and greater awareness, we feel there is much more growth to come.”

Jillian Godsil

Jillian Godsil is a contributor to The Irish Times