Sustainable finance: look to the long term
Contrary to the belief that sustainability principles are secondary during periods of economic recovery, today we see many companies entrenching these longer-term goals into their corporate strategies. Insights takes a look at how the sustainability agenda has evolved and the role that banking partners can play in financing sustainable practices.
How has interest in the sustainable finance market developed this year?
There’s an inescapable truth that has garnered increased attention through the COVID-19 pandemic: that is, the extent that social risks put pressure upon our entire society during such a crisis. While sustainable considerations (both social and environmental) have ascended the corporate agenda for many years, some had suspected that corporates, regulators, government (and banks) would temporarily divert their attention from sustainability objectives – and instead focus more intently on easing the economic recovery.
Yet this has not been the case. Rather, the pandemic has highlighted the importance of environmental, social and governance (ESG) issues and their intrinsic connection to long-term financial performance. In turn, concerted efforts are well underway to enable a sustainable recovery. And, to fund such initiatives, the sustainable debt market has grown considerably: once a small sub-segment of sustainable finance, green and social debt issuance has seen a dramatic increase.
How have corporates played a significant role?
Certainly, the pandemic has also brought additional scrutiny from investors, consumers and other stakeholders about the role that corporates play in addressing societal issues such as public health and climate change. Equally, large corporates are looked to as essential contributors to sustainable recovery. They are considered pivotal to change. And for good reason.
Many corporates are taking up the mantle in this respect. Some are raising capital to address the nearer-term challenges of the COVID-19 outbreak: for instance, large pharmaceuticals corporation Pfizer recently raised over US$1 billion of capital in the debt markets to devote to sustainability projects as part of its COVID-19 response. In August 2020, Alphabet, Google’s parent company, issued the largest corporate sustainability bond to date. The proceeds from the US$5.75 billion issuance will be directed to various environmental and social initiatives, including energy efficiency, clean energy and transportation, healthcare, diversity and inclusion and affordable housing. Amid this increasing momentum, we expect that sustainability-labelled or even sustainability-linked issuances will become increasingly commonplace.
What are the keys to unlocking further interest in sustainable finance?
Rightfully, one issue growing in importance is transparency – namely on issues such as how the proceeds of sustainability debt are allocated and whether they produce the intended social and/or environmental outcomes. Given the reliance on self-reporting and on currently underdeveloped benchmarking practices, this is no easy feat. This can often lead to claims that the societal impact of proceeds attached to sustainable-debt issuances is gravely exaggerated or misleading to the investor – a phenomenon often called “green washing” or “social washing”.
Yet regulators are making progress, particularly on demystifying the green finance space. Effective from July 2020, the EU Taxonomy provides a set of criteria that encourage asset owners to disclose more data in order help investors to better assess the sustainability credentials of a project or transaction, and redirect more capital flows to these financings. The Taxonomy is, in effect, a glossary that gives sustainable financiers a common language, as well as effective benchmarking practices. Along with industry-wide initiatives like the Green Bond Principles (a voluntary, global standard that serves as a guideline for the issuance process of green bonds), the Taxonomy could become a founding framework for issuances not only in Europe, but worldwide.
How are banking partners helping their corporate clients towards meeting sustainability goals?
Certainly, financial institutions can play an important role in sustainable development: not only as capital providers and intermediaries in the debt capital markets, but by easing the transition towards more sustainable practices.
Among the possible solutions that banks can offer their corporate clients are LMA-aligned green loans and sustainability-linked loans as well as the green-labelled variation of the Schuldschein loan – a privately-placed and tradeable instrument common to the German market that typically offers two- to five-year lending terms for corporates seeking to use proceeds for sustainable outcomes. Sustainability-linked loans can offer corporates credit lines that incentivise better sustainability performance – with the margin of the loan increasing or decreasing depending on the corporate’s ability to meet sustainability-linked key performance indicators (KPIs), which can include a sustainability rating or targets established from within the corporate’s business.
Beyond this, FIs also serve as crucial intermediaries within sustainable finance, directing other institutions’ capital towards such projects. This role comes largely as a result of the increasing capital and risk management requirements that limit the balance sheet usage of banks as well as the need to tap capital providers of different investment objectives to fulfil the much wider range of sustainable financing transactions. In this role, banks act as matchmakers – bringing investors to the investment opportunities.
What steps has Commerzbank taken to become a more sustainability-focused bank?
As our corporate clients internationally are prioritising sustainability credentials in their decision making, we at Commerzbank are firmly committed to supporting clients in the here and now, as well as with their long-term sustainability objectives – for the good of the planet, communities, and economic growth. For us, these two aims are not mutually exclusive; rather, they are fundamentally interconnected.
To make good on our commitments, we are taking steps to becoming Germany’s most sustainable commercial bank. We regularly act as Bookrunner on sustainable bonds and, since 2018, have acted as lead manager on 58 transactions with a total volume of approximately €44 billion. And, last year alone, we participated in 20 sustainable or sustainability-linked loan (including Schuldschein) transactions worth a total of €27.3 billion. With our Competence Center Energy in Hamburg, we are one of the largest financiers of renewable energies in Europe. The second Green Bond with a volume of €500 million issued very successfully by Commerzbank in September 2020 also serves to finance renewable energies.
In light of the growing propensity of highly disruptive risks, such as weather events and pandemics, financial institutions must take note of the potential impacts upon their operations. There is ample evidence that companies that demonstrate a commitment to developing longer-term resilience and make considerations for extreme disruptive events or even changing policy, consumer preferences and technology, are likely to be sound financial performers.
So, our strategy is clear: Commerzbank is committed to looking after the communities of tomorrow, by investing today.