Sustainable Financing Newsletter

Issue
04

The Quarter in Review Q1 2017

2017 has begun strongly with 50% year on year growth in terms of number of deals (44% in terms of USD volume)1, helped in part by the arrival of the French sovereign green bond. Impressively we now see over a dozen sovereigns developing green bond guidelines/regulation/ legislation and a similar number publicly declaring interest as issuers2.

Simultaneously, as the Green Bond market develops without defined criteria or disclosure regulation, there are increasing drives for improved quality of disclosure through e.g. the FSB task force. This is also evident in the wider trends to increase ESG/SRI investing, as seen by the Task Force on Climate-related Financial Disclosure (TCFD), the London Stock Exchange’s publication of its own ESG guidance. Growing investor activism is also playing a part in the increased pressure (most notably from members of sustainability advocacy group Ceres) to increase environmental disclosures.

TCFD expected to bolster shareholder climate resolutions in 2017 according to Environmental Finance, Ceres and CalPERS pension fund3.

The Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosure (TCFD) is expected to support shareholder resolutions on climate change in 2017 according to statements from CalPERS (California Public Employees’ Retirement System’s) investment director of sustainability Anne Simpson and data from Ceres. The combination of greater support for climate resolutions and the ratification of the Paris Agreement, as of November 2016, creates strong potential to increase the likelihood of resolutions associated with climate reporting on a 2°C transition scenario being passed.

There have already been over 129 climate-related shareholder resolutions to date this year according to the NGO Ceres4, showing the significant potential to progress the transition to carbon neutral economies through investor activism.

Last quarter TCFD members received and returned their comments on the draft of the phase II report. As part of the FSB’s 2017 work plan, this quarter updates to the Phase II report are due to be presented to the meeting of G20 finance ministers in the first quarter of 2017.

Last year’s Q4 update covered the progress of the TCFD so far, please see: (The Quarter in Review Q4 2016)

In January, eighteen European institutional investors, with assets totaling GBP2.07trn (USD2.6trn) (including the Church of England Pensions Board & Swedish National Pension Fund (AP4)) launched an initiative to support the TCFD’s call for investors to assess whether their portfolio companies are positioning themselves to transition to a low-carbon economy5.

London Stock Exchange Group publishes ESG guidance6

Reflecting the increasing involvement of shareholders in fostering better disclosure from issuers, the London Stock Exchange Group (LSEG) has launched a guide on company ESG reporting to investors to encourage more consistent reporting of data. The guide was released on the 9th February with a launch event at the London Stock Exchange.

The report was produced by three of the Group’s companies: London Stock Exchange, Borsa Italiana and FTSE Russell, after consultation with their listings, asset owners and asset managers.

This publication is a sign of the growing importance of disclosure for ESG markets and LSEG’s ambitions to lead the global harmonisation of ESG information with guidance that can be replicated by indices across the world and across asset classes held on the LSE.

Investor activism
Post the election of President Trump we have seen increased investor activism in the US, calling for improved disclosure and responsible investing.


Whilst President Trump’s administration continues with plans of strengthening the US fossil fuel industry and reversing recent leadership in international climate change initiatives (plans to revitalise the US fossil fuel industry clearly outlined in the President’s “America First Energy Plan”7 and Trump advisor Myron Ebell’s statement that the US will change course on climate policy are two of the commonly cited contentious statements), US investor groups have made increasing independent announcements to support a swift transition to a low-carbon economy, these include:

  • Framework for U.S. Stewardship and Governance. Under the banner of the Investor Stewardship Group a group of USD17trn of institutional investors including BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC) have unveiled the ‘Framework for U.S. Stewardship and Governance’8. The goal is to “codify the fundamentals of good corporate governance” and establish baseline expectations for corporations and their institutional shareholders.
    The group is calling on “every institutional investor and asset management firm” investing in the the USA to sign up to the framework
  • Eaton Vance Corp (AUM USD343bn) announced acquisition of responsible investment firm Calvert (AUM USD12.3bn) with the former’s CEO stating “It’s an entry into one of the most attractive areas of investing today”9
  • New York City Pension Funds Comptroller Scott Stringer, in speaking to The Responsible Investor, affirmed that the city’s pension fund will continue to use its investment to respond “to the reality of climate change”10

To come after this publication/early next quarter we expect to see greater involvement in the Green Bond market from sovereigns, notably Nigeria has stated publicly that they could launch their Green Bond as early as March/ April 2017; this would be the first sovereign Green Bond issuance from an African nation. Projected Use of Proceeds could reportedly include a broad range of climate-related initiatives such as mass transit, land re-afforestation, remediation and solar projects . In fact, according to the CBI, Governments could be expected to take up a 10% share of Green Bonds issuance this year according to Bloomberg New Energy Finance and the Climate Bonds Initiative , with the most common Use of Proceeds predicted to be (government infrastructure projects supporting) renewable energy, clean transportation and sustainable agriculture.

that they favour bonds (sovereign or otherwise) funding adaptation projects in the developed Western countries, where climate change impacts are already being seen (ie. river flooding in low lying, densely populated land has significant consequences) and mitigation projects in high CO2/GDP countries, which are typically less developed countries. (HSBC Global Green Bonds: The end of the beginning, Jan2017).


1Source: HSBC database: compiled from Dealogic, Bloomberg & the CBI (Climate Bonds Initiative)
2https://www.climatebonds.net/2017/02/lagos-conference-set-stage-nigeria-sovereign-green-bond
3https://www.environmental-finance.com/content/news/tcfd-to-bolster-shareholder-climate-resolutions.html
4Ceres shareholder resolutions database
5https://www.environmental-finance.com/content/news/investors-with-assets-worth-over-2trn-back-transition-to-low-carbon-economy.html
6http://www.lseg.com/resources/media-centre/press-releases/london-stock-exchange-group-launches-guidance-esg-reporting
7https://www.whitehouse.gov/america-first-energy
8https://www.responsible-investor.com/home/article/us_stew_code
9http://www.reuters.com/article/us-calvert-m-a-eaton-vance-idUSKCN12L2IW
10https://www.responsible-investor.com/home/article/investor_groups_react_to_us_plans_to_become_worlds_largest_energy_producer/

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Chapter
09

The Quarter in Review Q1 2017

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