Sustainable Finance

Recent years have seen a considerable expansion of what we now understand by the term Sustainable Finance.  The original pioneer instrument in the sustainable finance space was the Green Bond whose proceeds would be channelled into a set of pre-determined environmentally beneficial asset categories.

After its inception in 2007 with the debut Climate Awareness Bond issue of the European Investment Bank (EIB), the growth of the Green Bond market was relatively slow but in recent years volume of issuance has increased significantly, propelled by the realisation amongst politicians, regulators, issuers and investors that Finance can be a valuable tool in the fight against climate change. There are now also Social Bonds and Sustainability Bonds (a mix of green and social assets).  Combining these different classes of instrument together, total issuance of sustainable bonds in 2020 reached $700 billion, almost double the issuance of 2019*.  Although Green Bond issuance declined in H1 2020 due in part to the turbulent market conditions caused by the COVID pandemic, the slack was taken up by Social and Sustainability Bonds which were used to finance projects in the fields of health, welfare and education.  Green Bonds then staged a strong finish in H2 2020 and issuance has continued to surge in 2021.

Additionally, the market has produced new instruments such as Sustainability-Linked Bonds and has created process guidelines around which the market can coalesce.

Sustainable finance instruments are also available in Loan format with their own sets of guidelines, allowing borrowers who cannot or do not want to finance themselves in the public bond markets to access tailored finance for their sustainable projects.

Multilateral Development Banks (MDBs) were the pioneers in sustainable finance but now issuers from all sectors – including jumbo sovereign issuers – and of different sizes have come to the market.

As the market evolves, new complexities emerge with it. The market continues to balance the flexibility that has served it so well so far with an increasing demand for standardisation and an increasing focus on the unresolved question of what is ‘green’.  No global standard for ‘green’ currently exists and there are numerous competing (or complementary) taxonomies. The Green Bond Principles have underpinned the market but other frameworks have emerged in China and India, for example, and the EU has announced its own ambitious European Green Deal, has produced its own taxonomy and will bring out its own Green Bond Standard in the near term. Questions such as the need for issuers to provide Impact Reporting and in what format continue to be debated.

All this means that the process and route map for existing and potential  issuers of Sustainable Finance instruments is becoming more complex.  Additionally, other professionals such as lawyers, accountants and consultants have a growing need to understand the market and how it affects their own clients.

MMC brings its practical, hands-on experience and an independent stance to helping issuers, lenders and other market participants to navigate this pathway and understand the increasing complexity of the market.

 

*Climate Bonds Initiative