Sustainable development plans and investment plans are now required to secure stakeholders’ trust beyond shareholders, to safeguard long-term profitability, to protect the resilience of the supply chain, and also to remain attractive and address fast changing consumers’ expectations while developing a new source of income.
What has changed this year?
This year, 2021, is a defining year. On the back of a major health crisis, governments want to build back better. The financial industry, having realised that climate risk is financial risk, is engaging corporates and proactively managing their portfolio using ESG filters. Consumers were forced to behave differently during lockdowns. The adoption of new habits have led to integrating even more ESG concerns in the way they consume.
On the road to COP26, a fast growing number of states, companies and financial institutions have committed to being net zero by 2050 at the latest.
The collective nature of these net zero commitments, especially on the banking, asset managers and investors side, is a very powerful force that will increase the magnitude and speed of mega-trends, fostering heightened expectations of corporations’ sustainability plans.
As the race for sustainability has started, ambition, materiality, credibility of actions and transparency in disclosures are becoming key for companies to differentiate amongst their peers within a sector. These factors are also vital for investors to understand true over-performers vs. laggards.
Ultimately, the industry must collectively make sustainable finance a trusted enabler for a better business model and a better world.Constance Chalchat, Head of Company Engagement, BNP Paribas CIB
There is a shift from advocacy to disclosure. Investors are increasingly assessing the sustainable quality of their investments and the impact that these will have in achieving sustainability outcomes.
Within this context, sustainable finance has become a very important asset class and a vehicle of additionality, transition, decarbonisation, and positive impact. The robustness of sustainability-linked finance relies on four main drivers:
- Material and relevant key performance indicators (KPIs)
- High level of ambition
- Impact measurement
- Transparency through rigorous disclosures
However, additionality and positive impact at scale require these drivers to be implemented across the entire financial industry. In that respect, principles administered by the International Capital Market Association (ICMA) in the bond market, and the Loan Market Association (LMA)/Asia Pacific Loan Market Association (APLMA)/Loan Syndications and Trading Association (LSTA) in the loan market provide for harmonisation, best practice sharing and crucially promote transparency.
Guiding rules are evolving, further promoting transparency and robustness of the market
A new version of the Sustainability-Linked Loan Principles
In this context, the LMA, APLMA and LSTMA just released a new version of the Sustainability-Linked Loan Principles (SLLP) and their guidance document. This release aims to promote the transparency and integrity of the the sustainability-linked loan (SLL) market.
Key changes in the SLL principles include:
- An external audit of annual ESG data on KPIs is becoming mandatory
- A provision of three-year historical data on KPIs, and the referencing of the KPI to external benchmarks and science-based targets becoming mandatory (when possible)
- A stronger alignment with the ICMA Sustainability-Linked bond principles in terms of scrutiny but as well in the terminology (same five core components). This alignment facilitates the development of sustainability-linked financing frameworks enabling the issuance of a wide range of financing solutions, from bonds to loans to hedging, frameworks that lead the way to best address companies’ various needs.
Additionally, recommendations include:
- A Second Party Opinion (ex ante) on the materiality of the KPIs and ambitiousness of the targets
- A selection of recommended KPIs, chosen because of their material impact in a given sector.
This convergence on recommended material KPIs, combined with the external auditing of the KPIs will facilitate comparability of companies within a sector, and foster a more reliable analysis of peers’ true sustainability performance.
A new version of the Green Bond Principles (GBP) and Social Bond Principles (SBP)
- The 2021 edition adds two “key recommendations”, alongside the four core components of the GBP/SBP (Use of Proceeds, Process for Project evaluation and Selection, Management of Proceeds, and Reporting). Those key recommendations further formalise current market practices on:
- Frameworks: Issuers should explain the alignment of the Green or Social Bond with the four components of the GBP/SBP in a separate Framework and/or in legal documentation available to investors
- External Reviews: Issuers should seek pre-issuance review to assess alignment with the relevant Principles and post-issuance external review to verify the allocation of funds. These reviews must be publically available.
- It also recommends heightened transparency for issuer sustainability strategies and commitments
- It provides guidance to identify mitigants to material risks of negative social and/or environmental impacts
- It also makes the link with the Climate Transition Finance Handbook as a set of disclosure recommendations to consider for Use of Proceeds transactions (as well as Sustainability-Linked Bonds)
Benefiting from long-dated expertise is crucial
In this context, given the exponential growth of this nascent asset-class coupled with its importance for the future of our planet, relying on established experts in sustainable finance to provide transparency will be increasingly fundamental to avoid green washing and truly secure long-term stakeholders’ trust.
Sustainable finance is an enabler, a tool. To make the transition, companies must start with clear ambitions to make the necessary changes, or even radical transformations to their operations. Some will be better off beginning that journey with traditional financing, then progressing step by step with their sustainability plans to transition to lower carbon operations, rather than exposing themselves to greenwashing accusations and controversies. Making the right choice between a sustainability-linked or a use-of-proceeds instrument can be critical in the success of a financing and in securing investors’ trust.
At BNP Paribas, we have the sector expertise and track record, deep understanding of specific sustainability pathways whilst interacting daily with all key investors worldwide to advise companies on the most relevant financing solutions best suited for their specific objectives.
Ultimately, the industry must collectively make sustainable finance a trusted enabler for a better business model and a better world.