Pathways towards transition in the capital markets

Dissecting developments in sustainable capital markets and looking ahead to transition trends in 2021.

We speak to Frederic Zorzi, Global Head of Primary Markets at BNP Paribas and Delphine Queniart, Global Head of Sustainable Finance and Solutions for Global Markets about the transition finance universe.

In this unprecedented year, the world faced a global pandemic whilst being in the midst of the climate and biodiversity crisis. How has transition finance evolved in 2020 to tackle the pressing environmental challenges and progress towards the Paris Agreement? 
Delphine Queniart (DQ): The sustainable capital markets have really stepped up to support the transition. This is evidenced by a maturing of the ESG bond market to extend into sectors that are in the transition zone, including autos, cement and luxury goods. The big innovation we saw this year was the growth of the sustainability-linked bond (SLB). This is a new type of general corporate purpose bond in which investor coupons are tied to the sustainability KPIs of the issuer (for example decarbonisation) and is something that has transferred across from sustainability-linked loans (SLLs).

The broader capital markets acknowledged the importance of this development more recently when the European Central Bank included SLBs as eligible collateral in their asset purchase programmes. As a result, the market is recognising that the SLB is a useful transition tool for corporates.

Frederic Zorzi (FZ): The SLB has really been the game changer of 2020, and we saw significant interest from investors and corporates. This nascent market is already being recognised as ground-breaking by many actors within the global economy. We would expect this to increase in 2021, as the SLB provides a clear feedback mechanism to investors of how a company is progressing on its transition journey. 


The evolving universe of ESG Bonds


How are you seeing these developments reflected in sector transition pathways across the capital markets?
FZ: Issuance wise we are seeing a big diversity in the issuers coming to the capital markets to finance their transition through sustainable finance solutions. The year started with corporates tapping into transition bonds, which align use of proceeds to transition strategies.

In January, we worked on the first €500mn transition bond out of the UK from Cadent which financed the retrofit of gas, and scale up of clean energy. Then the pandemic struck and social bonds were the key priority for many SSAs, but transition remained a strong theme with corporates, evidenced by the pickup SLBs and green bonds from early summer onwards.

CHANEL’s €600mn SLB was a landmark in the luxury goods sector, and embedded progressive emissions reduction targets, aligning the funding strategy with their Mission 1.5 programme, and BNP Paribas acted as joint structuring advisor and joint bookrunner. Embedding climate targets continued to other sectors too, with decarbonisation SLBs from Suzano and Lafarge in the pulp, paper and cement sectors.

Finally, green bonds are increasingly issued in the autos space as carmakers accelerate electric vehicle (EV) adoption. This year we saw inaugural deals from Daimler and Volvo Cars, and the bonds were respectively four times and five times oversubscribed, highlighting strong investor demand for auto transition. BNP Paribas was joint book runner on Daimler’s Green Bond and Structuring adviser for Volvo Cars.

DQ: There is no one size fits all when it comes to transition finance. The Paris Agreement objectives call for limiting global temperature rise to 1.5°C, scientifically equivalent to a “carbon budget” that represents how much carbon can be emitted in order to avoid a given temperature rise. For a 1.5°C ambition, this translates to achieving net zero emissions at a global scale by 2050.

The next step is the translation of that global budget into sector and region-specific budgets and pathways. As shown in GFMA’s Climate Finance Markets and the Real economy December 2020 report in which BNPP contributed, scaling up transition finance across high carbon emission sectors such as steel, construction, transportation and beyond will be a critical factor in addressing climate change. We are seeing corporates increasingly making climate commitment targets reflected in sustainable capital markets frameworks, and transition finance can bring a tangible roadmap to support those approaches, whilst ensuring transparency, integrity and accountability.

A noticeable development is that the innovation in sustainable capital markets is extending beyond the bond market. For example, we recently supported the placement of the world’s first sustainability linked convertible bond for Schneider Electric which ties to decarbonisation, gender diversity and education. We expect to see further development of green equity and green equity capital markets solutions.

What role are investors playing in supporting this transition of corporates’ business models and will this change in 2021?
DQ: Many of the sustainable finance innovations we saw in 2020 were only possible because of the strong engagement approach investors are taking with corporates. The Net-Zero Asset Owners Alliance and the new Net-Zero Asset Managers Initiative (launched on 11 December), reflect the global group of investors determination to set ambitious targets and action plans to reduce emissions and build resilience. Investors are starting to ask very specific questions about corporates’ transition strategies, and this positive engagement appetite is reflected in oversubscription levels too.

FZ: It is hard to find an investor who is not ESG focussed anymore. When it comes to the investor profile of transition finance, not just green players are engaging on this from the investor side. It is also a global movement on engagement, and every region is mobilising on ESG issues.

There has been some potential scepticism from stakeholders about greenwashing risks as the market develops. What factors are in place to support integrity of transition finance so it tangibly addresses climate action?
DQ: To scale up additionality and positive impact requires industry wide implementation, including common standards. Green bond standards have been in place for many years now and BNP Paribas has played an active role in ICMA Principles executive committee and working groups to ensure that the market as a whole is moving in the right direction on standards. Most recently we helped develop the Sustainability-linked bond principles and the Climate Transition Finance Handbook. At a broader EU taxonomy level, BNP Paribas experts are also on the EU Platform.

Another way to avoid green washing is to get issuers to converge on a small set of the most relevant and material KPIs in each sector. Many corporates are collaborating with scientists on disclosures, such as the Science Based Targets Initiative (SBTI), which strives for increased disclosure and transparency of corporate climate ambitions. It is striking to see that some SLBs issued in the market have followed SBTIs recommendations. This will foster greater transparency for investors, enable comparisons to channel investments towards the most sustainable players, and ultimately drive additionality.

FZ: Some issuers will be likely moving from traditional financing to progressing step-by-step with transition financing. The ultimate aim is to reduce their environmental impact, whilst ensuring they adhere to a progressive strategy and engagement process with investors.

As we look ahead into 2021, what forces will shape transition finance over the coming months?
FZ: The pandemic has been an accelerator for most investors and issuers by adding the social aspect to the environmental crisis. This has increased the awareness of issuers around the ESG topics and willingness to address some of the issues they are facing. In particular we had an increased dialogue with issuers accessing capital markets from highly carbon intensive sectors, showing their intention to address the issue together with their funding needs.

DQ: As we head into 2021, it is clear that the scale of the climate crisis requires mobilising the whole economy transition, as also noted by former Bank of England Governor Mark Carney in his recent private finance strategy for COP26. The COP26 President and Mark Carney have encouraged CEOs to align with the Paris Agreement goals ahead of COP26. Financial institutions are also engaging on industry-specific decarbonisation initiatives that include portfolio measurement and reporting, such as PACTA. These transparent frameworks with credible milestones will be instrumental to support the transition towards a low carbon economy.

BNP Paribas engagement on energy transition

  • Policies – In May 2020, BNP Paribas announced the expansion of its coal exit policy to all OECD countries and its target to end the use of coal by its electricity-producing clients by the end of 2030.
  • Renewable energy lending – In 2019, 87% of the project financing BNP Paribas granted in the electricity generation sector was devoted to renewable energy projects, and 0% to coal-related projects. BNP Paribas has raised its target for financing the renewable energy sector to 18 billion euros by the end of 2021.
  • Product innovation in sustainable finance – The Bank is #1 in 2020 year-to-date Sustainable Bond Ranking. The bank has deployed its balance sheet to power the Sustainability-Linked Loan (SLL) market, and has reached #1 in the Global SLL League table H1 2020 (Mandated Lead Arranger). Source: Dealogic


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