By Federico Pezzolato, Sustainable Finance Business Development Manager for EMEA & APAC at ISS Corporate Solutions
In a recently commissioned Institutional Shareholder Services (ISS) survey, when investors were asked what actions their organisation would consider appropriate to take when a company is not seen to be effectively reporting on or addressing its climate change risk, 75 per cent of respondents said they would consider voting against directors deemed responsible.
This illustrates the process of climate risk being pulled into the boardroom and increasingly assessed by investors where previously such content had been peripheral to the annual meeting.
In addition, voluntary frameworks, such as the Taskforce on Climate-related Financial Disclosures (TCFD), aim to increase climate transparency in financial markets through recommendations on disclosure. This allows investors to actively monitor companies’ climate risk management and measure companies’ approaches to reporting, thereby informing the investment decision-making process.
Yet, in the same survey, only 11 per cent of companies agreed with this view. This highlights a potential structural disconnect between the preferences of investors and the actions of companies.
Unpacking this further, Figure 1 (below) shows that only 51 per cent of companies in Europe are disclosing information relating to the board oversight of climate risk.
FIGURE 1: Percentage of companies providing disclosure on board oversight of climate risks and opportunities
Drilling into this (Figure 2), more than two-thirds of the group that disclose any information at all provide more than a general reference to board consideration of climate-related issues.
FIGURE 2: Companies’ level of reference to board consideration of climate-related issues
As we explore climate risk management in more detail, a similar proportion of European companies, on average 54 per cent, are disclosing greenhouse gas (GHG) emission targets – though it is striking that only 14 per cent of the listed companies have GHG emission reduction targets that are aligned with the Paris Agreement’s long-term goal to keep the increase in global average temperature below 2°C.
However, this group of companies that are committed to the reduction of GHG emissions signal a noteworthy step in the right direction and we can reflect on that silver lining. Issuers entering this domain for the first time are increasingly in search of vehicles to support these efforts with the aim to avoid green washing. Consequently, 2020 marked a significant year in sustainable finance with issuers entering this market more than ever. Last year, the total green, social, sustainability and sustainability-linked bond (SLB) issuances surpassed $530billion, up 63 per cent compared to 2019, according to Environmental Finance.
FIGURE 3: Companies disclosing targets for reducing GHG emissions
As well as the increase in total bond issuances, the range of sustainability topics being addressed also expanded following the release of key new market guidelines. These included the Sustainability-Linked Bond Principles (SLBPs) and the Climate Transition Finance (CTF) Handbook, both administered by the International Capital Market Association (ICMA). These initiatives present opportunities for more sectors for sustainable debt financing and allows issuers more opportunities in showcasing their ambition and structuring their targets.
The CTF Handbook provides guidelines for issuers to demonstrate and communicate their transition strategy efficiently and advises on how to issue financing instruments that will help advance their strategy. This is particularly relevant to issuers that are in difficult-to-abate sectors in the transition towards aligning with the Paris Agreement. The Handbook is flexible in terms of the bond structure it can be applied to, as such, it can be used by issuers to showcase their strategy on climate change in the context of SLBs and use of proceeds bonds.
FIGURE 4: Environmental finance, 2020 sustainable bond issuance jumps two-thirds amid social breakthrough
Hence, SLBs are not only expanding the vehicles available to issuers for sustainable financing, but also allowing new sectors to access sustainable investors and funding opportunities. LafargeHolcim, one of the largest cement producers globally, is an example company that used the SLB structure to raise capital tied to the Paris Agreement on its entire business model. For this issuance, ISS ESG conducted the first ever Second Party Opinion (SPO) for a SLB in the cement sector. In the goal to transition to a carbon-neutral world, the negative environmental impacts of such industries must be reduced to the lowest level possible.
“The issuance of our sustainability-linked bond offered us a pathway to reach our target to decrease our CO2 emissions by 2030,” said Leila Sassi, financing and capital markets manager at LafargeHolcim. “We also wanted to give investors comfort that we are committed to climate risk management efforts.”
We are expecting to see continued momentum and more opportunities for a broad group of issuers covering a wider range of sectors. With this, we can look to the year ahead more responsibly, with increased consideration for climate factors to which we all contribute.
* ISS Corporate Solutions (ICS) works in collaboration with ISS ESG, the responsible investment arm of Institutional Shareholder Services, as the distributor of SPOs. While SPOs are sold and distributed by ICS, the analytical work to prepare and issue SPOs is performed by ISS ESG.
About The Author:
Based in London, Federico leads ICS’s sales of sustainable finance and second party opinions services, focussing primarily on companies in EMEA. With 15 years’ experience in the sustainability and responsible finance fields, Federico previously served with Vigeo Eiris as sustainability bond manager for Southern and Eastern Europe and emerging markets. In his role, he advises global organisations on understanding their sustainability commitments and facilitates their entry into the green and social bond market. Federico stewards engagement with clients across various sectors, including banks, private equity investors, utilities, food, automotive, telecommunications and sub-sovereign entities. Federico served as a corporate social responsibility (CSR) lecturer at several institutions, including Catholic University in Milan and Université Paris Nanterre. He holds a M.A. in CSR from the University of Bologna and a M.A. in International Relations from the University of Milan.