When it comes to accessing green and sustainable finance, stock exchange and market associations have a pivotal role – providing information, standards and frameworks in a fast-evolving space.
The resources and initiatives provided by the International Capital Market Association, the Loan Market Association and the London Stock Exchange Group, for instance, provide a foundation for issuers keen to understand how their actions can help them align with a broader and sustainable set of values than merely generating shareholder benefit and gain.
Katie Kelly – senior director, market practice and regulatory policy at ICMA
The International Capital Market Association (ICMA) counts issuers, banks, securities houses, asset managers and infrastructure providers among its members, and prioritises four, core fixed-income areas:
The views of large corporates are often under-represented when considering the cross-border regulatory interventions that affect them.
To address this, ICMA runs a Corporate Issuer Forum (CIF), which ensures that corporate issuers’ concerns and interests are reflected in ICMA’s output, and that they have a powerful, effective and collective voice when it comes to shaping market and regulatory developments.
CIF members participate in ICMA’s Sustainable Finance Committee, which aims to address cross-cutting sustainable finance developments, and in a separate CIF Sustainable Finance Working Group, which operates at a more granular level, providing technical expertise and market input.
The bond markets play an essential role in financing the transition to a sustainable global economy.
Since 2014, ICMA has developed the Green Bond Principles (GBPs), Social Bond Principles, Sustainability Bond Guidelines and Sustainability Linked Bond Principles (SLBPs), all of which have become the leading framework globally for issuance.
Of particular note, the GBPs provide issuers with guidance on the key components involved in launching a green bond, help investors by ensuring availability of information necessary to evaluate their green bond investments, and assist underwriters by moving the market towards standard disclosures.
The SLBPs are voluntary guidelines for sustainability linked bonds, defined as forward-looking performance-based bond instruments where the issuer is committing to future improvements in sustainability outcomes within a predefined timeline.
The bond markets play an essential role in financing the transition to a sustainable global economy
The market for sustainable finance continues to grow rapidly, supported by myriad international initiatives from governments, regulators, exchanges, financial industry associations and market participants themselves.
ICMA is at the forefront of many of these developments.
To assist in their understanding, it has recently published a compendium of international policy initiatives and best market practice, plus a High-level Mapping to the Sustainable Development Goals, Sustainable Finance High-level Definitions, designed to ensure a common and transparent vocabulary.
It has also produced a Memorandum on the EU Sustainability Disclosure Regime, which gives a comprehensive and practical overview of the significant sustainability and ESG-related disclosure requirements from new and amended EU legislation.
ICMA also sits on the European Commission’s Technical Expert Group, which has developed:
A Usability Guide for the EU Green Bond Standard focuses especially on defining projects aligned with the taxonomy, the content of green bond frameworks, and reporting requirements and templates.
Importantly, the EU Green Bond Standard is a voluntary standard, and the Usability Guide explicitly states that “EU GBS aligned bonds are [ICMA] GBP-aligned by definition”.
It remains to be seen whether the EU legislative changes will form part of UK law following the Brexit transition period. But it is likely that the UK will seek to maintain equivalence to, if not exceed, EU standards.
Gold-plating in the UK has already started, for instance by the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority.
For those not subject to this supervision, an expectation of the UK’s Green Finance Strategy is that climate-related risk disclosures would be required for listed companies and large asset owners by 2022.
Gemma Lawrence-Pardew – senior associate director at the LMA
The Loan Market Association (LMA) is committed to supporting the development of green and sustainable finance markets throughout Europe, the Middle East and Africa.
The LMA’s recent work in green and sustainable finance has focused on developing consistent market standards and guidelines, together with rolling out an education programme to create a knowledge benchmark for practitioners of green and sustainable finance.
Over the past three years, the LMA, working together with the Asia Pacific Loan Market Association and Loan Syndications & Trading Association, has published the Green Loan Principles (GLP), Sustainability Linked Loan Principles (SLLP), together with supporting guidance for both the GLP and SLLP, and a glossary of terms.
In developing the GLP and the SLLP, the LMA has sought to provide the market with a high-level framework with which to align its loan products and through which it is hoped that the integrity of these loan products will be preserved.
Education and the creation of a knowledge benchmark in this, relatively juvenile, market is a key priority of the LMA
The GLP focus on the utilisation of loan proceeds for green projects, and provided certain core criteria are met (around use of proceeds, project evaluation and selection, management of proceeds and reporting), designate that the loan shall be green.
A list of indicative categories of eligibility for green projects is set out in Appendix 1 of the GLP. The GLP align with the Green Bond Principles to allow for optionality in both the bond and loan markets when borrowers come to refinance.
The sustainability linked loan product is dynamic and innovative. It enables lenders to incentivise improvements in the borrower’s sustainability profile by aligning loan terms (for example, margins) to the borrower’s performance against ambitious, predetermined specific performance targets.
Similar to the GLP, the SLLP set out a global framework based around four core components:
Education and the creation of a knowledge benchmark in this, relatively juvenile, market is a key priority of the LMA.
We have created a catalogue of online webinars looking at different elements of the green and sustainable finance markets, from the technical topics of the EU Taxonomy and Task Force on Climate-related Financial Disclosures recommendations to the commercial considerations of transition finance and data availability.
The LMA has sought to make as many of these resources as possible public, available to both members and non-members, in a bid to facilitate the development of these markets.
Elena Chimonides – fixed income product specialist at the LSEG
Financial markets play a pivotal role in the transition to a greener, more sustainable economy. Efficient capital markets enable the mobilisation and reallocation of capital towards the opportunities presented by a green economy.
London is one of the world’s largest capital markets and sits at the heart of the global financial system. The City is recognised as the leading centre for green finance. London Stock Exchange Group (LSEG) plays a key role in this ecosystem, with a unique function serving and connecting both investors and issuers.
LSEG is committed to improving the transparency, visibility and access to capital for green and sustainable commercial activities worldwide. LSEG supports companies across multiple sectors to access the capital needed to address environmental risks and opportunities.
These firms range from new green-growth ventures to long-established companies that are making their transition to a more sustainable business model.
Tools such as our ESG Disclosure Score calculator and ESG reporting guide help our issuers gauge the transparency of their sustainability reporting in relation to market best practice. These tools also help them identify areas for improvement.
LSEG’s focus on the green economy spans both fixed income and equities. In October 2019, we launched two new initiatives: the Green Economy Mark for equities issuers and the Sustainable Bond Market (SBM).
Both initiatives are designed to support issuers, companies or investment funds, and are raising sustainable capital and demonstrating their green credentials to investors.
The cross-asset nature of these projects was highlighted in the recent Environmental Finance Sustainable Investment Awards, where LSEG was named Stock Exchange of the Year.
Financial markets must play a pivotal role in the transition to a greener, more sustainable economy
SBM offers segments for certified green, sustainability and social ‘use of proceeds’ bonds, but also recognising the latest developments in sustainable debt financing.
This is an issuer-level segment that enables companies generating more than 90% of their revenues from green initiatives to list standard corporate bonds in a specified segment. As we see more issuers integrating sustainable performance into their business strategies, products such as sustainability linked bonds have emerged.
Following the publication of ICMA’s SLBPs in June 2020, LSEG was one of the first exchanges to respond by amending the eligibility criteria on its SBM to accommodate instruments issued in accordance with these principles.
This breadth of offering enables fixed-income investors to support green economy issuers through the bonds in which they invest while retaining full flexibility in terms of issuance structure.
The market has recognised this flexibility. At the beginning of August 2020, SBM was home to more than 240 securities raising £41bn from 61 individual supranational institutions, governments and corporates. This includes the first sustainable debt issuances from China, India and the Middle East.
UK issuers also represent a significant proportion of the market, with domestic issuance accounting for almost half of the total volume displayed on SBM, including landmark deals from Anglian Water, Barclays, Clarion Housing, NatWest, Northern Powergrid and Yorkshire Water.
Organisations and individuals across the world are aiming to adapt to the ongoing pandemic. In this context, sustainable debt financing offers an increasingly relevant funding tool option for issuers looking to mitigate the economic impacts of global lockdown. LSEG has been proactive in supporting our clients.
In April, we were the first exchange to introduce a fee waiver for any social or sustainability bonds issued on SBM whose proceeds aim to mitigate the impact of COVID-19.
The recent launch of the SBM Advisory Group, made up of key market stakeholders in the sustainable finance space, also provides a forum for new market themes to be discussed. This enables LSEG to continuously monitor the changing needs of our clients and ensure we can proactively respond and update our platform in the most effective way.
Both the Green Economy Mark and the Sustainable Bond Market build on expertise from LSEG’s FTSE Russell business. For almost 20 years, since the launch of FTSE4Good Indexes, FTSE Russell has helped promote sustainable investment, developing indexes, data and analytics tools.
This sustainability expertise and data is now being applied to help our issuers consider climate change and other sustainability priorities to communicate more effectively with investors, and to use this to raise capital.
Financial markets must play a pivotal role in the transition to a greener, more sustainable economy. These new initiatives underline LSEG’s commitment to playing our part – developing practical solutions to support issuers and investors in this transition.
Thank you to our three participants.
This article was taken from the October/November 2020 issue of The Treasurer magazine.