Are Banks Really Going Green, Or Just Greenwashing?

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Are banks really going green, or just green, greenwashing? The key themes of 2021

Environmental Finance | Winter 2020 Corporate & Investment Banking

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AF PAG_Environmental Finance_279x216_Sostenibilidad_2020.indd 1 16/11/20 13:50 Contents

4 News 12 Green bonds Sustainability-linked bonds Green bonds begin to flow are ‘more powerful than from emerging market banks green bonds’ A pioneering initiative by the IFC to encourage green bond issuance by banks in emerging markets is bearing fruit, reports Graham Cooper 5 News S&P’s ESG capabilities boosted by $44bn IHS Markit 14 The big debate merger

6 Themes to watch

Transition bonds: Is a transition bond label still needed, now that Looking the Sustainability-Linked Bond Principles have been published?

ahead to 2021 Yes, argues No, argues Marisa Drew Jacob Michaelsen Peter Cripps assesses some of the key trends in sustainable finance to look out for over the next year of Credit Suisse of Nordea

16 Impact 10 Fixed income ESG ratings in fixed income: Impact is part of pension A good start trustees’ fiduciary duty, says coal pensions CIO ESG ratings should only be used as a first step when it comes to assessing issuers, a panel at Environmental Finance’s Managing a pensions investment portfolio in line with ESG and Fixed Income 2020 conference heard. environmental and social impact considerations can be part Ahren Lester reports of trustees’ fiduciary duty, Michael Hurley reports

Environmental Finance | Winter 2020 1 Contents

18 Cover story 28

Are banks really going green, or just greenwashing? Some of the world’s largest banks have made hundreds of billions of dollars in commitments to sustainable financing, with many pledging to align their Environmental markets portfolios with the goals of the Paris Agreement. Christopher buoyant despite pandemic Marchant asks whether these commitments are impactful 30 GHG markets 24 Natural capital 38 Weather risk 40 Renewable Energy Certificates

45 Catastrophe risk

‘The time is right to 46 People moves invest in natural capital’ 48 Infographic How does HSBC Pollination Climate Asset Management aim to attract large-scale investment in natural capital, 2020: the year the social bond came of age Michael Hurley asks

Editor Peter Cripps SUBSCRIPTIONS Environmental Finance or otherwise, without the written Consulting Editor Graham Cooper Business Development Manager (ISSN 1468-8573) is published permission of the publisher. Assistant Editor Michael Hurley Borte Mehmetcik quarterly by Field Gibson Media Ltd. Content Strategist Annabelle Palmer T: +44 (0)20 3651 7203 Environmental Finance does not accept Senior Staff Writer Ahren Lester F: +44 (0)20 3651 7205 Registered office: responsibility for views and details Staff Writer Christopher Marchant E: [email protected] Pentagon House, expressed in advertisements and Data Researcher Ashton Rowntree 52-54 Southwark Street, corporate statements. These are made Managing Director Tony Gibson London SE1 1UN. by the advertiser and are not checked Art Direction Sargeant Design Ltd Chairman Peter Field by Environmental Finance. © Field Gibson Media Ltd, 2020. Business Development Manager Environmental Finance All rights reserved. No part of this Neil Porteous Pentagon House, 52-54 Southwark publication may be reproduced, Marketing Director Tracey Huggett Street, London SE1 1UN stored in or introduced into any Events Marketing Manager T: +44 (0)20 3651 7203 retrieval system, or transmitted, in Tommaso Dimitri F: +44 (0)20 3651 7205 any form or by any means, electronic, E: [email protected] mechanical, photocopying, recording

2 Environmental Finance | Winter 2020 HSBC

Taking the long view on climate data HSBC’s analysts have been collecting climate data since 2007. Piers Butler and Ashim Paun explain the bank’s approach, how the data is used – and what comes next

Environmental Finance: HSBC’s Climate wide decarbonisation has grown and evolved. One Solutions Database is one of the longest we’re watching particularly closely is the rise of running corporate climate datasets in the the hydrogen economy: we see an ecosystem of market. Can you explain its genesis? clean hydrogen production emerging to meet Piers Butler, head of Global Research demand from across the economy, including from Direct: The bank has long recognised the threat transport, heavy industry as well as domestic heat. posed by climate change and the responsibility of the finance sector to play its part in addressing it. EF: What plans do you have to develop We established the Climate Change Centre of HSBC’s sustainability-related data offering? Excellence in 2007 and, in the same year, HSBC AP: Our ESG Database, a new proprietary Global Research launched the HSBC Climate offering, includes 10 key environmental, social and Solutions Database. governance metrics for companies under HSBC We screen listed companies of all market caps coverage. This includes around 1,900 companies across all global markets for climate revenue globally, with half in Asia Pacific. Data collection exposure. The database is run jointly by the ESG is based on publicly available information and Piers Butler Ashim Paun and Equity Strategy teams, and it involves a year- undergoes a rigorous normalisation process. The round process of manual gathering of relevant EU Taxonomy – how aligned are the two database has a three-year history, from 2016-18. climate data. approaches? The 10 key metrics were selected to give a AP: Almost all the climate themes and technologies broad indication of the status of ESG information EF: What is unique about the database, and in our framework are covered in the EU Taxonomy, disclosure at companies covered by HSBC Global how is it used by your clients? including solar, wind, geothermal, marine, hydro, Research. Using this disclosure as a starting point, Ashim Paun, global co-head, ESG bioenergy, building efficiency and transport our equity analysts look in more detail at sector- Research: The database offers a toolkit that efficiency. The six environmental objectives of the specific ESG issues and work towards integrating enables identification of climate change-themed EU Taxonomy – climate mitigation, adaptation, ESG into their financial analysis. investment opportunities. Its long history of sustainable water use, transition to a circular Our Fragile Planet series of notes and curated data shows how themes, corporate activity economy, pollution prevention and ecosystem underlying framework of metrics is an additional in climate technologies, and country- and regional- protection – are all also covered, to a considerable proprietary offering. It explores climate change level cleantech industries have developed over time. extent, by our framework. vulnerability and resilience across 67 developed, Our taxonomy is detailed. The database However, the two approaches are somewhat emerging and frontier markets. In our most recent currently includes 21 climate themes, which are different, with the EU Taxonomy also addressing cut, we use 54 datapoints which explore transition further divided into more than 80 sub-themes negative ESG impacts, which our Climate risks associated with fossil fuel use and economic and over 100 product categories. From a starting Solutions database does not currently do. However, dependence, cleantech and industrial innovation universe of around 14,000 companies, just over we continually enhance our process, methodology potential, physical climate risks and aspects of 3,000 are currently found to have some climate and framework, and this is something we are climate governance. revenue and enter the database for a detailed examining. Our clients can then look at where they have analysis. asset exposure across corporate equity and debt, The raw data can help signed-up clients to EF: Presumably such a broad and long- sovereign debt and real assets, to identify either identify opportunities, integrate climate change running dataset generates some useful positive drivers or negative risks around specific into investment management processes and insights into how the climate theme is evolving metrics. determine the climate exposure of their portfolios. – what signals is it sending? We publish reports each year in which we update We publish related research notes. These PB: We’ve seen a substantial increase in the the methodology and provide the underlying data may include analysis of market trends in climate number of companies which our database picks up to clients. In the most recent, Finland was best themes – i.e. those which look fundamentally more as generating climate-related revenues – up around placed overall, given a relatively good score on attractive than others. We also publish baskets of four-fold since 2008. There have been particularly physical risks and very low air pollution, strong companies which give revenue exposure to policy sharp rises in companies from emerging regions – institutional quality to govern environmental risks changes, country and regional markets, or to LatAm, MENA and Asia. and high levels of innovation in climate-relevant trends, such as the clean transport transition and The total amount of climate revenues generated sectors. climate-smart cities. by companies globally has also been increasing, up by one sixth in the last five years of data. We’ve also For more information, please email: EF: Its focus on climate-linked revenues seen a growing number of themes and products as [email protected] is similar to the approach taken by the the industrial response to demand for economy-

Environmental Finance | Winter 2020 133 Labelled bonds

Sustainability-linked bonds are ‘more powerful than green bonds’

he ‘use of proceeds’ model adopted by most green bonds came under attack, at a panel at Environmental Finance’s ESG in Fixed Income Europe 2020 virtual conference,T amid allegations that it is susceptible to ‘greenwashing’. Speaking at the panel ‘Is the use of proceeds model fit for purpose’, Jakob Thomae, managing director for Germany at the 2 Degrees Investing Initiative (2DII), described investing in controversial corporates through green bonds, as being “a Jakob Thomae, 2DII Johanna Koeb, Zurich Ben Caldecott, Oxford little bit like having a cousin who is going to Insruance University school and also taking drugs. “So, I tell myself I’m just going to give This year the International Capital Market that they would like to get some impact. him pocket money for school books [the Association (ICMA), which administers And that’s where the green bond or the use green bond]. And, meanwhile, the other the Green Bond Principles, introduced of proceeds bond has been transparent, for money he makes he’s spending on his drug principles for sustainability-linked bonds, showing the impact on where the investor’s habit, but I can be happy because I’m just while guidelines on transition bonds were money is going, and that’s why I still think giving him the book money.” released in December. there is room for the use of proceeds The debate over the use of proceeds Ben Caldecott, director of Oxford [model].” model comes as a range of new sustainability University’s Sustainable Finance Eusebio Garre, head of funding at IDB labels have been introduced in the sector Programme, said: “Sustainability-linked Invest, said: “Both models have their own in recent years, including transition bonds, bonds, and indeed sustainability-linked merits, both for issuers and for investors. which adopt the use of proceeds model, and loans, are a really significant development The KPI-linked model innovates by sustainability-linked bonds, which do not. for the future of sustainable finance, and are appealing to issuers because it does provide Responding to Thomae’s comments, much more powerful and important than them with full flexibility on the use of Johanna Koeb, head of responsible most of the green ‘use of proceeds’ stuff out proceeds, as long as they can commit in a investment at Zurich Insurance Company, there in the market. transparent and consistent way to improve said: “I do disagree with the examples “The reason for that is very simple, which very specific KPIs. he made about green bonds because it’s is that it creates a clear economic incentive “However, I think the jury’s still out somewhat makes them sound like they’re all for issuers to change their behaviour. The about how many issuers are going to be able useless, and they’re all greenwashing and it’s magic happens when a key performance to deliver such a consistent and credible connected to companies as if taking drugs. indicator (KPI) is found that both reduces message.” So that kind of language, I know is nice and credit risk, but also improves environmental The EU’s forthcoming green bond provocative, but I think it does injustice to and social outcomes.” standard also came under fire. Thomae the market. He advocated that the market should said it was possible that under the standard “The idea of integrity is not necessarily pivot away from green bonds and towards a corporate could issue a ‘use of proceeds’ tied to the instrument. Both the ‘use of sustainability-linked bonds. bond while the overall carbon output of proceed’ and the sustainability-linked But Jens Hellerup, senior director, head the business rises. He described this as “an models are focused around transparency of funding and investor relations at Nordic unfortunate choice”. and integrity, and I think both come in more Investment Bank, the largest issuer of green ambitious and in less ambitious forms. It’s bonds in the region, defended the ‘use of The panel discussion was moderated by the duty of investors to make up their minds proceeds’ model: “When we have been Tanguy Claquin, head of sustainable banking, Crédit Agricole CIB [about the credibility of the issue].” speaking with investors, they have been vocal

4 Environmental Finance | Winter 2020 M&A

S&P’s ESG capabilities boosted by $44bn IHS Markit merger

inancial services giant S&P COMPREHENSIVE SOLUTIONS S&P GLOBAL IHS MARKIT has agreed to merge with data provider IHS Markit, in ESG scores with time series data ✔ DATA & Workflow and reporting platforms ✔ a mega deal that will boost PLATFORMS S&P’s already-considerable Emissions database ✔ environmental,F social and governance ESG equity indices ✔ (ESG) firepower. ESG fixed income indices ✔ The all-stock merger values IHS Markit BENCHMARKS ESG evaluations ✔ at $44 billion, including $4.8 billion of net debt. Upon completion, current S&P Price benchmarks (carbon, hydrogen) ✔ Global shareholders will own approximately Climate and transition scenarios ✔ 67.75% of the combined company, ANALYTICS Plastics circularity ✔ while IHS Markit shareholders will own Asset valuations ✔ approximately 32.25%. Both companies have been steadily Company offerings (Source: S&P Global) increasing the ESG-related products and services they offer, so the move will have consists of credit ratings, financial markets The scores are powered by the SAM ramifications for the rapidly consolidating data, Platts energy data and indices. It also Corporate Sustainability Assessment (CSA), and expanding ESG data market. provides ESG services such as its Global an annual engagement capturing around Assets that will become part of S&P’s ESG Scores and green bond assessments, 1,000 data points per company. A media operations include IHS Markit’s ESG the S&P Global Ratings Green Evaluation. and stakeholder analysis further captures a Reporting Repository, an online platform Currently S&P’s Global ESG Scores company’s involvement and management for the collection, storage and dissemination assess the industry-specific ESG factors of ongoing ESG issues or crisis situations. of corporate ESG data and reports. expected to have an impact on a company’s S&P bought SAM’s ESG research capability IHS Markit earlier this year launched growth, profitability, capital efficiency from Robeco earlier this year, the latest in a country-level data for more than 200 and risk exposure. The scores contain series of ESG-related acquisitions. countries with a 10+ year observation coverage of 7,300 companies, representing In 2016, S&P Dow Jones Indices (DJI) period for 40 key sovereign risk factors. In approximately 95% of global market acquired environmental data provider 2019, it developed a service to provide ESG capitalisation. Trucost. Christopher Marchant information specifically for private equity firms, their investors and their portfolio companies. Deutsche Börse buys majority stake in ISS In the same year, IHS Markit launched German financial exchange operator Deutsche Börse has acquired a majority stake in Institutional Shareholder Services (ISS), valuing the corporate governance and environmental, a Global Carbon Index which tracks the social and governance (ESG) data provider at over $2.2 billion. performance of the largest and most liquid The Frankfurt Stock Exchange operator said the partnership of its Qontigo arm – which carbon markets – the European Union’s combines its STOXX and DAX index business with its Axioma analytics unit – with the Emissions Trading System, the California capabilities at ISS will provide additional ESG opportunities for growth in the fast-growing Cap-and-Trade Programme, and the sector. In particular, the deal will allow Deutsche Börse to provide stiffer competition for MSCI and other providers of ESG indexes. Ironically, MSCI preciously owned ISS. Regional Greenhouse Gas Initiative on the Deutsche Börse chief executive Theodor Weimer said: “Together, ISS and Deutsche Börse east coast of the US. have complementary ingredients to become one of the globally leading ESG players of the IHS Markit is also a registry provider future.” for the voluntary carbon markets, a role for ISS has been one of the most acquisitive players in the ESG data market. In February 2019, it bought CAER, a provider of ESG research on Australasian companies. Two and a half years which it has regularly been recognised in ago, ISS bolstered its ESG offering through the acquisition of German ESG data provider and Environmental Finance’s Voluntary Carbon second opinion provider Oekom. The deal came just months after ISS bought the investment Market Rankings. climate data division of South Pole Group. In 2015, it acquired green advisory firm Ethix, Meanwhile, S&P’s sprawling business expanding its environmental services. Ahren Lester

Environmental Finance | Winter 2020 5 Themes to watch Looking ahead to

Peter Cripps assesses some of the key trends in sustainable finance to look out for over the next year

1. COP26 2. Race to net-zero carbon Whether it turns out to be a success or a A Race to Zero Campaign was launched in failure, one of the key moments of 2021 will June by the UNFCCC, as pressure mounts be COP26, in Glasgow in November. to take action ahead of the COP. The landmark Paris Agreement, at There have already been numerous COP21 in 2015, allowed countries to set net-zero commitments in recent weeks, their own targets. But as part of the deal, including: countries were expected to ratchet up their • The UK in December raised its 2030 commitments every five years. target to 68% compared to 1990 levels, up That was supposed to happen in 2020 at from 53% previously, to help it meet its “More pension funds COP26, but it was delayed a year because 2050 net zero target. It claims this would of the coronavirus. Now there is even more be the fastest rate of decarbonisation of and asset managers urgency surrounding the event. any major economy. will make net zero Being held in the UK, it is hoped that this • Japan in October said it will cut emissions COP will have a particularly strong focus to net zero by 2050, up from its previous commitments for 2050, on finance, led by former Bank of England target of 80% by the same date. governor Mark Carney, who has been • South Korea in October also pledged a with near-term targets. appointed the Prime Minister’s Finance 2050 net zero target. Adviser for COP26. Climate finance and • China, the world’s biggest GHG emitter, The Net Zero Asset the role of financial institutions and central in September said it would hit net zero Owner Alliance will banks will therefore be under the spotlight. before 2060. This was its first net zero Another key aspect to watch will be how target. dominate, as the most Article 6 is progressed. It should clear up Paris-based policy research institute IDDRI the role of carbon markets in the agreement, argues that net-zero targets are the legacy of serious and influential of including the extent to which countries are COP21. these commitments” allowed to use offsets to help hit their targets. Its recent paper on climate neutrality Also, look out for developments on the points out: “As of November 2020, more Fiona Reynolds, Principles for Just Transition (see below). than 110 countries have committed to a Responsible Investment net-zero objective. These represent in total

6 Environmental Finance | Winter 2020 around half of the world’s GDP and global Will the change in attitude towards

CO2 emissions, and include notably the climate also boost the uptake of ESG in the totality of the G7 and a majority of the G20. country? “Carbon neutrality has also become a reference for a growing number of non- 4. Central banks step up their state actors (NSAs). For example, 1,100 companies have adopted carbon neutrality focus on sustainability goals and joined the UK COP26’s Race to Central banks have in recent years become Zero Campaign alongside other NSAs. key players in sustainable finance. “It is stunning to see how fast this concept The Central Banks and Supervisors of carbon neutrality, barely discussed Network for Greening the Financial System beyond experts before 2015, is now (NGFS) now has members accounting for mainstreamed and widely understood by more than 60% of global emissions. leaders and society.” In an interesting development, it has been Investors are not immune from this trend. widely reported that the US Federal Reserve The Net Zero Asset Owners Alliance is has applied to join the NGFS. already gaining traction, with 33 signatories While it now seems that many central representing $5 trillion of assets, which banks accept that climate change is a have committed to reduce their portfolio legitimate part of their remit on financial emissions to net zero by 2050. stability/systemic grounds – this was not the Fiona Reynolds, CEO of the Principles case five years ago – it remains to be seen for Responsible Investment, predicts: “More how far they will go in promoting this cause. pension funds and asset managers will make Eurozone banks will, in 2022, be stress- net zero commitments for 2050, with near- tested on their ability to withstand climate- term targets. related risks, the European Central Bank has “The Net Zero Asset Owner Alliance will said. dominate, as the most serious and influential In the UK, the PRA is starting to stress of these commitments. Pension funds test banks and insurers, while the FCA is will realise that engagement alone will not making TCFD reporting mandatory. get them to net zero – they need to move The NGFS has devised scenarios that investments from brown to green and invest should help with TCFD-style reports and in negative emissions technologies.” have been used to inform stress tests by the French central bank. 3. The US reawakens A recent report by the London School of After four years in the wilderness, the US Economics, which examines the pandemic is expected to push forward with action on response measures by central banks in 180 climate change. countries found that just one – Fiji – takes President-elect Joe Biden has pledged to climate and sustainability factors into rejoin the Paris Agreement, and has made account. climate change one of his top four priorities. Since then, Sweden’s Riksbank has said Despite the current administration having it will start to exclude corporate bonds ignored climate change, there was a growing from its asset purchases on norms-based trend towards climate action at city, state and criteria, such as breaches of the UN Global company level. Compact. What will Biden do to make up for lost time? 5. Natural capital concerns Biden’s website says: “As president, Biden Accelerated by the Covid-19 pandemic, will lead the world to address the climate investors are rapidly waking up to the emergency and lead through the power of dangers posed by biodiversity and habitat example, by ensuring the US achieves a loss. 100% clean energy economy and net-zero There have already been numerous emissions no later than 2050.” developments, such as a report by the So, will he set an official net zero target, Dutch central bank saying that the country’s for example? What will his Green New Deal financial institutions held €510 billion ($600 look like? billion) of investments that were exposed to

Environmental Finance | Winter 2020 7 Themes to watch

biodiversity risks. it could boost credibility. Earlier this year, four French fund managers — Axa Investment Managers, 7. Implementation of the EU BNP Paribas Asset Management, Mirova and Sycomore Asset Management – Action Plan launched an initiative to develop a tool The EU’s ambitious and sprawling to help investors integrate nature and Sustainable Finance Action Plan is the biodiversity considerations into their biggest concerted policy effort to implement decision making, while a group of Dutch sustainability into the financial system. financial institutions established the But as its efforts start to bear fruit, what Partnership Biodiversity Accounting impact will it have on the market? Financials to measure the positive impact of It has so far made progress on initiatives investments in biodiversity. such as a ground-breaking taxonomy of 2021 could be the year of action. climate mitigation and adaptation activities, There are hopes that the UN Biodiversity which will underpin initiatives such as a Conference in Kunming, China, between green bond standard. Its taxonomy is out for 17-30 May will lead to commitments for ‘no consultation, but it leaves the highly political net biodiversity loss by 2030’. question of nuclear in the balance – could it The Task Force on Nature-related find its way back into the programme? Financial Disclosures (TNFD) this year Mark Carney: Investors should be given It has appointed a ‘Platform’ on established an informal working group to an automatic advisory vote on companies’ sustainable finance, which will start the help financial institutions better understand transition plans work of extending the taxonomy into other and report their nature-related risks and environmental and social areas. It is also impacts. In collaboration with the corporate set to consider looking at a so-called brown sector, reporting frameworks will be EU has announced plans to raise, via green taxonomy – covering activities that are developed in 2021, and tested early in 2022 bonds, some 30% of the funds it intends to environmentally harmful. before being made available worldwide. The borrow from public markets and has already It has published low-carbon and transition Task Force will be fully established in the issued over €30 billion of social bonds to benchmark criteria – will this trigger a raft second half of 2021. help protect jobs. of new indexes, and how extensively tracked This trend will likely lead to more “Overall, we expect sovereign and SSA will they be? products to address biodiversity loss, issuance to make up a growing share of Sustainability disclosures will begin in particularly those that focus on land use and overall [labelled] bond issuance in 2021, as 2021 but many are claiming that there is the blue economy. governments find ways to fund their large insufficient data to allow them to report, For example, Pollination Capital and stimulus spending,” the note said. particularly asset managers. HSBC have launched a $1 billion fund to Meanwhile, the Sustainability-linked Perhaps most importantly of all, will focus on natural capital solutions (see page Bond Principles were launched in June and its regulations and initiatives be emulated 24). there have already been six issues since, elsewhere around the globe, making the EU Environmental Finance has launched a raising more than $6 billion combined, the standard bearer of sustainable finance? channel on natural capital to make stories according to Environmental Finance’s Bond on biodiversity and other aspects of natural Database. 8. Transition capital easier to find. A transition finance handbook was Transition will remain the real ‘buzz word’ released in December. However, debate in 2021. After all, the aim of the game is 6. The labelled bond market at a rages as to whether such a label is needed, or to move away from ‘business as usual’ to whether the standard green bond label can something more sustainable, preferably crossroads incorporate transition. alignment with the 1.5°C goal of the Paris It has been an interesting year for the The labelled bond market is evolving fast Agreement. labelled bond market. The green bond but is also under intense scrutiny to prove Mark Carney recently suggested investors market has finished with a flourish, despite that it ‘makes a difference’ and is not just a could be given an automatic advisory vote a blip as a result of the pandemic, while the marketing gimmick. on companies’ net-zero transition plans, social bond market enjoyed a stellar year, Sustainability-linked bonds are gaining similar to ‘say on pay’ shareholder rights to with a seven-fold rise in the value of issuance traction but to what extent will they help vote on executive remuneration. compared with the previous year. this market grow, or will they cannibalise it? However, it is a subject that continues to A recent note from Barclays said ongoing The green bond market could also take a hit be fraught with controversy. government stimulus could help boost to issuance volumes as a result of the EU’s The real problem is that we still don’t labelled bond supply. It points out that the forthcoming green bond standard. However, know what the scenarios are or what the

8 Environmental Finance | Winter 2020 policy pathways are. It will be interesting But the extent to which impact can are ‘green’. to see if regulators, perhaps through the become a mainstream investment category, But there are concerns around whether NGFS, build some central scenarios under rather than a niche, remains to be seen. After offsetting is really the right answer. The which everyone must report. all, a case can be made for ESG because ‘Financing credible transitions’ paper from While some feel that a separate transition it can be used to help mitigate risks. But Credit Suisse and Climate Bonds Initiative finance label is needed, others argue that making investments that produce a positive doesn’t consider them to be a serious the EU taxonomy of sustainable finance impact on people and planet alongside a solution, for example. activities should suffice because it contains financial return is a harder sell to investors The Taskforce will issue a final report stretching targets for sectors that need to with fiduciary duties. in January, including a roadmap for transition, such as cement and steel. The PRI is incorporating “real world implementation. outcomes” into its reporting next year, in a The market seems set for rapid growth, 9. Just transition nod towards where the market is heading. and prices could also be pushed up by the Countries that have signed up to the Paris However, this has proved controversial, standardisation of credits. Agreement have agreed to “take into with Norway’s giant sovereign wealth fund account the imperatives of a just transition warning of mission creep. 12. Consolidation of ESG of the workforce and the creation of decent A report from law firm Freshfields into work and quality jobs in accordance with impact investing, which has been delayed reporting standards nationally defined development priorities”. until 2021, could make a significant In November, we learned that the Companies must also take notice. In difference – in the same way that a similar Sustainability Accounting Standards Board November, energy utility SSE published report published in 2005, around ESG and (SASB) and the International Integrated what it says is the first company Just fiduciary duty, helped boost the uptake of Reporting Council (IIRC) are to come Transition plan, following pressure from ESG. together to form a new organisation, the investors to spell out how it plans to support Environmental Finance has its own Value Reporting Foundation. employees, consumers and its supply chain dedicated Impact channel. The merger is a significant step towards as it cuts its emissions to net zero by 2050. simplifying the corporate reporting Its 19-page Supporting a Just Transition 11. Voluntary carbon markets set landscape, linking the IIRC’s integrated document sets out 20 principles across five reporting framework with SASB’s disclosure key themes: good green jobs; consumer to boom standards. fairness; building and operating new assets; A Mark Carney-initiated taskforce focused The Value Reporting Foundation, which looking after people in high-carbon jobs; and on rapidly scaling up global voluntary will be led by SASB chief executive Janine supporting communities. carbon markets in November opened to Guillot on its formation ‘in mid-2021’ could To coincide with the publication of consultation on its initial report on forming a eventually integrate other entities, and the SSE’s strategy, investors Friends Provident global carbon market. Foundation and the Climate Disclosure and Royal London published a set The Taskforce on scaling voluntary Standards Board (CDSB) have jointly of ‘expectations’ for energy utilities when carbon markets (TSVCM) said voluntary signalled interest in entering into exploratory developing just transition strategies. Colin carbon markets must jump 15-fold by 2030 discussions in the coming months. Baines, investment engagement director to achieve global climate goals of limiting The merger will also advance the work of at Friends Provident, told Environmental global temperature rises to 1.5°C by the end the Statement of Intent To Work Together Finance the investor has been working with of the century. Towards Comprehensive Corporate Royal London on similar engagements with Although recognising that the voluntary Reporting. Published in September, this EDF, Eon, RWE, Centrica and Iberdrola- carbon market has made “significant was a summary of alignment discussions owned Scottish Power. strides” since its early days in both market among leading sustainability and integrated Expect more focus on the Just Transition functioning and credit integrity, in order reporting organisations including the IIRC in the build-up to COP26. to be able to scale significantly, “structural and SASB as well as the CDSB, CDP and challenges” need to be solved, including a the Global Reporting Initiative (GRI). 10. Impact – can it go mainstream? lack of consistency and price transparency. Guillot said: “We stand ready to engage The Taskforce outlined 17 with the efforts of the IFRS Foundation, Impact investing is an exciting and rapidly recommendations across six topics. These IOSCO, EFRAG, and others working growing part of the sustainable finance include establishing core carbon principles towards global alignment on a corporate market. Some argue it is the next phase (CCP) that could be used to create reporting system.” of sustainable investment, following ESG standardised benchmark contracts to be In July this year, SASB and the GRI integration. listed on exchanges. also announced a collaboration to show how Big firms such as Bain are lending As well as companies making net-zero their two standards can be used together to credibility, in the form of scale, with the commitments, more investors are turning to help ease the reporting burden. launch of $1 billion impact funds. offsetting to help them claim that portfolios So, watch this space!

Environmental Finance | Winter 2020 9 Fixed income

ESG Ratings in fixed income: A good start

ESG ratings should only be used as a first step when it comes to assessing issuers, a panel at Environmental Finance’s ESG and Fixed Income 2020 conference heard. Ahren Lester reports

roviders of environmental, ESG rating for a company. Issuers are social and governance (ESG) rarely informed about when or how these ratings have been urged changes happen, however. by fixed income market Federated Hermes research and participants to be more sustainable fixed income head Mitch transparentP with their underlying data Reznick warned that using ESG ratings and methodologies, so that the tools can as the key performance indicator on become more credible and convenient. which the coupon of sustainability-linked Speaking at Environmental Finance’s bonds hinge should be avoided for as ESG in Fixed Income Europe 2020 long as there is the risk that issuers could virtual conference, Moody’s Investors go “ratings shopping” to find the most Service ESG senior vice-president favourable score to use. This is an issue Swami Venkataraman said “the scores are compounded by the lack of transparency important, but I think equally important on data and methodologies. – or perhaps even more important – is the reasoning and the thinking behind the Importance of ratings analysis scores”. However, Reznick said ESG ratings are an Ørsted ESG engagement head Christine “important part” of the analysis, assessment Swami Venkataraman, Moody’s Investors Service: look beyond the ESG scores Sobieski added that there is increasing and pricing of ESG risks as a quick and easy interest from banks using ESG ratings way to grab information for an initial look. in sustainability-linked loans, raising the He told Environmental Finance, however, prospect that they could find their way that it was a “colossal mistake” for ESG detail from a first look in a note more extensively in the fixed income investors to merely run ESG ratings over when looking at a universe of 20,000 market through sustainability-linked their portfolio. companies,” he said. “So, we need to start bonds in the future. ESG Portfolio Management managing somewhere, and that is where we use “This is a really positive development,” partner Christoph Klein agreed that ESG ESG ratings to screen the issuer. But it is she said. “But I would say that in order ratings are “just a starting point” in his just the first step, and all the other analysis for us, as a company, to be more likely ESG fixed income investment process, follows after that.” to actually use ESG ratings in the effectively serving as an initial exclusion sustainability targets that are linked to filter, before digging deeper into the Mixed messages such financial instruments, I think that we company. Klein said the firm starts by Reznick emphasised that ESG ratings will need to see more transparency and selecting only BBB or higher ESG-rated come with significant downsides – not predictability around the methodologies firms before applying additional exclusion least being that not all ESG ratings used by ESG ratings.” criteria and then measuring their impact “deliver the same message” on ESG for She added that ESG ratings agencies on the UN Sustainable Development the same issuer. One rating may focus adjust their methodologies regularly, Goals (SDGs) and climate risk. on the financial materiality of their ESG sometimes resulting in changes to the “It is just impossible to get full profile, whilst another may be focused on

10 Environmental Finance | Winter 2020 Christine Sobieski, Ørsted: Need for more Mitch Reznick, Federated Hermes: ESG Christoph Klein, ESG Portfolio transparency and predictability around ratings are an “important part” of the analysis Management: Ratings are “just a starting methodologies point” in the investment process the ESG values woven into the fabric of record? Do you say that it may be electric ‘Here to stay’ the company itself. The outcome is that cars, but the cobalt is being mined using there is often limited correlation between child labour in the Democratic Republic Reznick suggested ESG ratings may ratings. of Congo? Oftentimes, ESG investors have been “eclipsed” by the “increasingly Venkataraman agreed, explaining are not all the same and they can give sophisticated” way investors now handle that Moody’s has its own ESG scores importance to different aspects of this, ESG. He said investors are asking about increasingly integrated into its core just as ratings do,” he said. carbon footprints of a portfolio, or credit reports which focus on financial other socially responsible investment materiality. Meanwhile, Moody’s owns Looking forward metrics, which ESG Ratings often do not V.E, formerly known as Vigeo Eiris, There is also the challenge of the largely provide. Instead, he is turning to tools, which takes a “broader perspective” on backward-looking data underpinning the such as those provided by CDP and the ESG Ratings and looks beyond financial ESG Ratings. Sobieski said that an ESG Transition Pathway Initiative (TPI). materiality. Rating – which usually lasts a year – can be ESG ratings are “here to stay,” he adds, “We acknowledge the need for that and based on data that is as much as two years but “every analyst and portfolio manager why some investors may want to have that old. Even the freshest ratings, however, needs to really dig further – talk to the perspective as well,” he said. only offer a snapshot of the ESG profile companies and use the other primary In August 2019, the Massachusetts of a company at that moment in time sources of information that are out there”. Institute of Technology published a with little consideration for their forward- Venkataraman said this approach was research paper of five ESG raters – V.E, looking ESG trajectory. not hugely different from how credit KLD, RobecoSAM, Sustainalytics and “Maybe I build a portfolio of low rated ratings are used by investors. “Credit Asset4 – which showed an average bonds from an ESG point of view, but I rating agencies put out our ratings – and correlation of 0.61 between their ESG think these are the transition companies investors want them and use them – but scores. In contrast, the correlation of that are moving in the right direction,” investors have their own credit analysis the credit ratings of Moody’s Investors said Reznick. “It makes sense to be in process in coming up with their own Service and S&P Global Ratings – the those corners of the market as well as with judgement. I see the use of ESG Ratings two main providers – stood at 0.99. the leaders. I think that is how you affect as being very analogous to that.” Venkataraman said that this lack of change as well.” So, is it time to regulate ESG ratings correlation was not a case of “factual Klein agrees that it is “absolutely clear” like credit ratings? Reznick does not divergence” but rather of different that focusing on transition is the way to think this is required until ESG ratings emphasis. As an example, he pointed to drive positive ESG change. “If you only have a similarly material financial impact US electric vehicle maker Tesla. buy the best, it can be expensive. It is all on pricing and valuations as their credit “Do you say they have an excellent about your future potential – both in price cousins. climate profile? Do you say that they terms, but also on ESG and sustainability “I’m not sure we are there yet,” he have a controversial governance track terms.” said.

Environmental Finance | Winter 2020 11 Green bonds

Green bonds begin to flow from emerging market banks A pioneering initiative by the IFC to encourage green bond issuance by banks in emerging markets is bearing fruit, reports Graham Cooper

reen bonds have now been issued Jean-Marie Masse, chief investment officer arranged by Symbiotics. by more than 65 countries. But at the IFC. “We teach them the benefits of Symbiotics provides advice to banks, the market remains dominated green bonds and how to issue them.” pension funds and other institutional by development banks, European The training was designed in partnership investors about sustainable and inclusive sovereigns and utilities, and with the International Capital Market finance and serves as an asset manager governmentG agencies in Europe and the US. Association (ICMA) and gives bankers a for their ‘impact’ investments, particularly Issuance from emerging markets has grounding in the Green Bond Principles in developing countries. Two Symbiotics grown rapidly in the past year but, aside and the importance of green bond issuers’ executives attended the Stockholm course, from China and a few sovereign issues, the disclosures to investors, with case studies so “we were training the trainers,” notes bulk of these bonds have come from the and workshops helping to illustrate best Masse. energy sector. practice. All four Turkish deals were labelled green, This is starting to change, however, thanks sized at $50 million, and listed in Dublin. largely to an educational initiative aimed at They varied in tenor between four and 10 financial institutions in emerging markets “We teach them the years. The Ego fund has allocated about 3% which forms part of the International benefits of green bonds of its assets to each of them. Finance Corporation’s (IFC) Green Bond The Symbiotic bonds were smaller in Technical Assistance Program (GB-TAP). and how to issue them” size – ranging from $3.5 million to $10.25 Organisations attending the course have Jean-Marie Masse, IFC million – and their proceeds were used for issued eight bonds since August 2019, loans to financial institutions in Sri Lanka, raising a combined $228.25 million. Peru and India. The latter two were labelled GB-TAP was launched in January In total, 19 banks from 11 countries as social bonds while the Sri Lankan deals 2019 to complement the Amundi Planet were represented on the course: Thailand, were both labelled green. One of the Sri Emerging Green One (Ego) fund – the Philippines, Indonesia, Georgia, Armenia, Lankan bonds was issued in US dollars but world’s largest emerging market green bond Turkey, South Africa, Nigeria, Benin, the other three bonds were issued in local fund – in which the IFC is a cornerstone Togo and Senegal, says Johan Nordlund, currencies. investor. While the $1.42 billion fund created programme director – finance, at the Symbiotics used a special purpose vehicle demand for emerging market green bonds, Stockholm School of Economics Executive – Micro, Small and Medium Enterprises the GB-TAP was designed to create supply. Education. They were joined by two Bonds SA – to issue these bonds, which The training course at the heart of representatives from Symbiotics, a European are all listed in Luxembourg. This structure GB-TAP was initially run as a two-day firm that helps arrange financing for micro, allows a single issuing framework to be event in Singapore and Thailand, then as small and medium size enterprises in used for all four bonds, thus minimising a five-day course at the Stockholm School emerging and frontier markets. transaction costs, notes Dirk Dijksma, of Economics in June and October 2019. Covid-19 has brought an end to the in- Symbiotics’ Geneva-based head of Attendance on the Stockholm courses was person events but the course material is now innovation investments. Each bond is linked by invitation only and preference was given being converted into an online format. This to a single loan, he explains. to banks that were already issuing in the will first be presented to bankers in Eastern “I see huge potential” in this model, traditional bond market. Europe and Africa and then, on a separate says his colleague Mattia Corato, a The course tutors explained why green occasion, to potential issuers from Latin London-based portfolio advisor. Two more bonds could be a better option for such America, says Masse. bonds – both from Armenian banks – were banks, by helping them broaden their The bonds issued since the Stockholm coming to market as this article went to investor base and motivate their staff, in training fall into two groups. Four were press. One was labelled green, the other addition to the environmental benefits, says issued by Turkish banks and four were sustainability.

12 Environmental Finance | Winter 2020 Now tracking Green and Sustainability- www.bonddata.org Linked loans

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and participation from more issuers along Yes, argues Marisa the credit curve. The five transition principles In respect of transition investment The Financing Credible Transitions paper Drew of Credit Suisse opportunities, investors were also lays out five principles for an ambitious beginning to grumble about the fact that transition: 1. Align with zero carbon by 2050 and irst, let me explain why we there are many self-labelled ‘transition’ nearly halving emissions by 2030; launched in September the or other types of labels cropping up, but 2. Be led by scientific experts and not be Financing Credible Transitions with no consistency to the labels and no entity- or country-specific; white paper with the Climate agreed methodology or market-adopted 3. Be sure that credible transition goals and Bonds Initiative (CBI). The framework to govern the transition market pathways don’t count offsets; 4. Include an assesment of current and Fdocuments present a framework designed and help protect it from greenwashing. expected technologies which can be to support the rapid growth of a transition Meanwhile, from the issuer community, used to determine a decarbonisation bond market and define what a transition I was hearing a great deal of frustration pathway; label should encompass. from high carbon-emitters that really do 5. Be backed by operating metrics rather than a commitment or pledge. I was hearing directly from institutional want to make the investment to transition, debt investors who were keen to put more but do not qualify under existing green money to work in sustainable strategies bond market principles to access that apply not only at a use of proceeds level generally, but also specifically in supporting market. These companies recognise that but also at an enterprise level – we are transition opportunities. In addition to they need a huge amount of investment to trying to encourage whole-business model wanting to see more brown-to-green migrate their business models and would transitions in addition to investments in corporate issuance, they wanted to see a like to access a dedicated pool of transition- greener activities or projects. And we want broader definition and more diversity in the aligned capital. to make sure that the transition label and ‘uses of proceeds’ in the green bond market In response, we surfaced these issues concept is not limited to debt; we think this to the CBI, who agreed that there was a should be applicable to equity issuances, gap in the market. We first explored the asset-backed structured solutions, and so possibility to expand the existing Green on. Bond Principles (GBPs) in an attempt to We actually think sustainability-linked bridge this gap and meet these stakeholder bonds and loans represent a subset of requests. There was, however, a general transition finance that can neatly fall under reluctance to adjust the GBPs because they our proposed transition framework and are well understood by the market and ethos. operate effectively and efficiently at scale. They are not mutually exclusive – we Instead, we birthed the notion of creating think they’re actually complementary. That a ‘sister market’ to sit alongside the green said, not all issuers or investors want to see bond market, with a specific framework their coupons linked to sustainability KPIs, and robust set of principles for those and linking the cost of capital to KPIs does dedicated to a sustainable transition. not work for all asset classes. And after a year’s work we came out We want to encourage the broadest, with a paper to articulate this vision. most inclusive lens when thinking about For issuers looking to use the the provision of capital to fund transitions transition label, it prescribes five while still protecting the integrity of principles (See box). the markets to allow them to scale with Given the investment needs of confidence. trillions of dollars to ultimately get us globally to a net zero emissions Marisa Drew is chief sustainability officer and global head of sustainability strategy, status, we wanted this framework finance and advisory at Credit Suisse. to have a broad reach and to

14 Environmental Finance |Winter 2020 Is a transition bond label still needed, now that the Sustainability-Linked Bond Principles have been published?

Taxonomy would provide3) the risk of No, argues Jacob ‘Greenwashing’ goes up. To this extent, it seems to me that, from a broad market Michaelsen at Nordea perspective, ‘Transition Bonds’ carry more potential downside risk than we Note: For the purposes of this article, the term Transition Bond refers to ‘use of proceeds’ bonds only can hope to gain from them.

et me be clear to begin with – Sustainability-linked structures are ‘Climate Transition Finance’ is better suited to address arguably the most important transitioning anyway topic for the sustainable finance market to deal with in the More specifically to the point of this Lcoming 12-36 months. And rightfully so. article, I maintain that Sustainability- We have already spent considerable time Linked Bonds (SLBs) are better on accepting Green into the mainstream, suited to deal with transitioning than and have even gone to great lengths in Transition Bonds, for the simple point codifying this in a Taxonomy as part of that sustainability-linked structures are the EU’s Sustainable Finance Action Plan. forward-looking in nature, and use-of- This inevitably leaves the topic of ‘Brown’ proceeds are not (necessarily). That is, or ‘Transition’ (recognising that these SLBs require improvements on a KPI terms are not synonymous) as the next, – or the transitioning from something to but not final, frontier. something better. Indeed, this was recognised by the EU- That is in contrast to Transition Bonds, appointed Technical Expert Group on where we cannot guarantee overall Sustainable Finance in their final report improvement of the issuer, but simply that on the Taxonomy, where they highlighted the underlying projects are “not as dirty as that a fully realised Taxonomy should they could be”. incorporate also “technical screening anything that is not ‘Dark Green’ Obviously the market for SLBs is still criteria for significant levels of harm to represents transitioning. in its infancy and one could certainly environmental objectives. (...) So-called 2. Green bonds are/should be for highlight that we need better definitions ‘brown’ Taxonomy criteria.” everyone. To this point, it is somewhat of what “material” and “ambitious” hollow to say that an oil company can’t means – especially in the context of The case against ‘Transition issue a green bond if you would buy transitioning. That said, I maintain that, Bonds’ a green bond from any of the major for the time being, we are better off, as banks, most of whom have significant a market, to give SLBs our full attention With that said, let me also be clear and oil-related exposure on their balance instead of diverting it to a label that is not state that I do not believe the market sheet. In any case, isn’t a green bond fully understood and which may call into currently needs a new Transition Bond from, say, an oil company seeking to question the validity of the overall labelled label. The key reasons for this are: invest into renewable energy not the bond market. That hardly seems a sensible 1. ‘Transition’ is already baked into the purest form of transition there is?2 move to me. Green bond market. This is eloquently 3. In the absence of clear and well agreed- formulated in the ‘Shades of Green’1 upon definitions for what constitutes a Jacob Michaelsen is head of sustainable methodology, where, in essence, relevant transition (such that an updated finance advisory at Nordea.

1. As popularised by ‘CICERO Shades of Green’, the second party opinion provider 2. I recognise that many would argue that this would require a credible transitioning story away from fossil-based energy production. A valid point, but one that deserves more nuance than can be afforded here. 3. There is already a number of credible and relevant initiatives providing guidance on this, such as the Transition Pathway Initiative

Environmental Finance | Winter 2020 15 Impact

Impact is part of pension trustees’ fiduciary duty, says coal pensions CIO

Managing a pensions investment portfolio in line with environmental and social impact considerations can be part of trustees’ fiduciary duty, Michael Hurley reports

ark Walker, who as CIO portfolio, because of environmental, social, the social side, relating to jobs and of the UK’s Coal Pension or changing consumer preferences and communities, should be a part of what we Trustees (CPT) manages behaviours, that’s a risk to returns – so do. two pension pots with those are financial,” Walker said. “The question comes back to: do we a combined £21 billion have any products out there that can M($28 billion) in assets – the British Coal deliver those financial returns we want Staff Superannuation Scheme and the “It’s our fiduciary but also have an impact from a green and Mineworkers Pension Scheme – said on a duty to consider the jobs & communities perspective? Who is webinar hosted in November by the UK’s thinking about those things? There needs Impact Investing Institute: “I’m no lawyer, members’ expectations. to be leadership. If that’s something we but I do think [the pensions industry] does want to do, could we find somebody to get mixed up sometimes, from a fiduciary [We] should be expected work with, and in what asset classes and duty perspective, when we separate things to look at socially so on?” into financial and non-financial aspects.” CPT trustees do not currently target Walker was speaking alongside Denise responsible investing asset classes or individual investments with Le Gal, chair of the £30 billion Brunel and, better yet, to make a positive sustainable or “impact” attributes Pension Partnership, and Melanie Cusack, as a primary objective, its responsible a professional independent trustee, on a positive impact” investment policy says, but the scheme webinar that asked: Fiduciary duty: a duty Melanie Cusack, a professional “already has certain investments that have to care or a duty of care? a sustainable focus”. Attendees heard why understanding the independent trustee Because CPT’s assets are managed by positive and negative environmental and third party investment managers, the main social impact of investments is increasingly focus for ESG integration is the evaluation becoming an important consideration for He said trustees’ fiduciary duty and assessment of those external trustees. includes being receptive to the wishes managers’ policies and procedures. “If the world is changing, capital flows of their beneficiaries when it comes to Denise Le Gal, chair of the £30 billion are changing and we may have to make environmental and social impact. CPT Brunel Pension Partnership pool of 10 UK money or manage risks in a different members tend to prefer a focus on jobs pension funds, who was speaking on the way in the future, are these financial and when considering low-carbon investments, same webinar, said: “Everything we invest non-financial issues really unconnected? Walker said: “The coal industry [in the in has an impact. The question is: is it good Perhaps they’re the same thing, and the UK] wasn’t closed down for environmental impact, or bad impact? non-financial issues end up being financial reasons [when it was privatised in 1994], “Expectations around fiduciary duty in the future. but it had such an impact on jobs that are different in different places. But one “If I’ve got stranded assets in my when we think about the energy transition, common element is that it is no longer

16 Environmental Finance | Winter 2020 “Impact will only become more relevant. Post-Covid-19, for example, we sense a heightened consciousness around climate change and human capital, to name a few issues. And we want to do something about that” Denise Le Gal, Brunel Pension Partnership just about hardcore financial returns, it’s “They now want us to make all of our by a member over its handling of climate increasingly more nuanced around impact portfolios sustainable and responsible. This change risk, which could spark further and outcomes. is a big challenge and not as easy a task as legal climate challenges at pension fund “We believe impact will only become it may seem, as it looks very different for managers. more relevant. That requires pension different asset classes, and the impact will “The timing for this conversation is funds like ours to go along the road that be different for each of these, but the point absolutely perfect right now. Trustees the leaders are setting and also go one remains: to maximise impact, our clients [in the UK] in the last few months have step further, to help influence and shape and Brunel want to exercise our duty of had to outline their investment beliefs policies as they are set by governments and care, through prudential stewardship of and what they are doing in the area of regulators [as they relate to impact]. our beneficiaries’ assets.” responsible investment [as required by The “Post-Covid-19 for example, we sense a Melanie Cusack, a professional Pensions Regulator]. We need to keep that heightened consciousness around climate independent trustee of 17 schemes, also momentum going while it’s still fresh.” change and human capital, to name a few speaking on the webinar, said: “I feel Cusack and CPT’s Walker agreed that issues. And we want to do something about it’s our fiduciary duty to consider the trustees should adopt a long-term strategy that.” members’ expectations. We’re already that includes considerations around However, there is a limit to fiduciary expected to focus on things like good sustainability and impact, and clearly duty as it relates to impact, Le Gal said: governance and ensuring good member articulate this strategy. “We have to be careful as a collective that outcomes. But I feel this voice should In September, the Impact Investing the momentum doesn’t go too far. If you be used as well to be expected to look at Institute published five ‘guiding principles’ go too fast, for example by excluding so socially responsible investing and, better for pension trustees that outline the many [companies from investment] that yet, to make a positive impact. concrete steps trustees can take to pursue you lose any meaningful engagement, one “Not least because there’s already been an impact investing strategy. might risk being in breach of the trustees’ rumblings that suggest it’s only a matter New risks and opportunities must be duty to care. Trustees are not NGOs. of time before members demand it of us. considered by trustees when balancing “For us, fiduciary duty is all about There’s an expectation that is rumbling risk and return in investing their pension managing fiduciary risk. If you focus on below the surface in the UK and is being funds’ assets, the Institute said at the risk [and] financial return in a balanced echoed in other countries – for example time. “Trustees may therefore consider way you should get it right.” with the REST superannuation case in it prudent to adopt investment strategies Le Gal added that many of the 10 Australia. She was referring to the AUD60 that reduce the negative impacts arising underlying funds in the Brunel partnership billion ($42 billion) Retail Employees from, and impacting on, their portfolio and “are shifting their focus from traditional Superannuation Trust pension fund, which search for positive impacts which provide asset classes to drive impact and outcomes”. has settled a court case brought against it financial opportunity.”

Environmental Finance | Winter 2020 17 Cover story

Are banks really going green, or just...

Some of the world’s largest banks have made hundreds of billions of dollars in commitments to sustainable financing, with many pledging to align their portfolios with the goals of the Paris Agreement. Christopher Marchant asks whether these commitments are impactful

growing number of banks and the commitments often span the fuels or other sectors. One example of this have made headline-grabbing groups, rather than just the lending arms. came from French lender BNP Paribas, sustainability commitments in Understanding the impacts of such which said in May 2020 it is speeding up recent months. sprawling and complicated firms can be its timetable ‘for a complete exit from coal’, Banks to have made such problematic. expanding to all OECD countries its target Apledges include JP Morgan, Morgan Stanley The commitments typically set a target to end the use of coal by its electricity- and HSBC. (See box below.) for increasing what they define as green producing customers by the end of 2030. Yet these pledges are typically greeted or sustainable finance, by a set date. For Increasingly, banks are making explicit with a chorus of disappointment from example, in February 2015 Citigroup mention of the Paris Agreement, and NGOs, who make comments that can be was one of the first global banks to make ultimately a timeline of aligning a portfolio summarised as: “the commitments are a a significant sustainable financing pledge, to its goals. For example, in October this step in the right direction but do not go far in this case a commitment to lend, invest year JPMorgan committed to use its position enough, particularly when it comes to fossil and facilitate a total of $100 billion over as a financier to pressure clients to align with fuels”. 10 years to finance activities that reduce the Paris Agreement and work toward global The real-economy impact of these the impacts of climate change and create net zero-emissions by 2050. sustainability commitments is difficult environmental solutions that benefit people to quantify, and claims of greenwashing and communities. NGO scrutiny abound. NGOs are looking for evidence that As lenders to the ‘real economy’, banks So, how to assess the credibility of these banks are changing their behaviour away arguably have a greater impact than other claims? from ‘business as usual’, and these types of types of investors, often reaching sectors One of the main problems when commitments tend to come under fire for such as SMEs and households that asset comparing and contrasting sustainability merely identifying opportunities for scaling managers do not directly influence. pledges is that they are often inconsistent up green finance. This could for example Lenders’ sustainability commitments, and there is no common standard or include underwriting green bonds, which therefore, attract increasing NGO scrutiny. framework to which they all adhere. critics argue do not constitute ‘additional’ In 2019, at a time of growing shareholder Another challenge is the widely varying green finance. pressure on banks to increase their and complex nature of lenders, which are It is rarer, however, for banks to set targets sustainability commitments, NGO the World often part of broader financial groups, or commitments to reduce finance to fossil Resources Institute (WRI) analysed 23 of

18 Environmental Finance | Winter 2020 the 50 largest private sector banks that had of the pile, according to the WRI’s ‘Green businesses across Canada, and doubled the made sustainable finance commitments at Targets’ assessment framework. size of its Indigenous Banking business. the time. In June 2019, BMO Financial Group Hackett says: “The timing of the WRI Each bank was rated against six indicators, announced commitments to “support a questions was unfortunate, as it was just out assessing whether the commitment made by thriving economy, sustainable future and of step with our disclosure period. Based the bank: inclusive society”. According to the bank, on what’s happened in the meantime, I • defines sustainability criteria, by 2025, BMO will mobilise CA$400 wouldn’t characterise us as being wildly out • identifies the financial services included, billion ($309 billion) for sustainable finance, of step with anyone else.” • provides a specific timeline, increase support for small businesses and However, on the subject of ‘available • discloses an accounting methodology, women entrepreneurs, and commit to ‘zero methodologies’ (the fourth bullet point in • includes a plan for reporting, and barriers to inclusion’. the WRI’s criteria), Hackett admits that this • has a level of accountability, such as being However, the announcement failed to has not been published but says it will “likely endorsed by the bank CEO or chair. meet five of the six indicators laid out by the be forthcoming”. Ariel Pinchot, an associate at WRI’s WRI. On the other hand, Wells Fargo’s Sustainable Finance Center, says: “The Jonathan Hackett, managing director commitment achieved all six of the WRI’s commitments from private sector banks are and head of BMO’s Sustainable Finance indicators for an effective sustainable an important signal of their contributions [to Group, insists BMO’s poor ranking is financing commitment. In April 2018, the transition to a low-carbon economy]. mainly the result of unfortunate timing, Wells Fargo announced it will provide $200 “While they seemed conceptually simple pointing out that the bank has since made billion in financing to sustainable businesses at first glance, it was really hard to say at face radical improvements to the accountability and projects by 2030, with more than 50% value how these commitments compared, and specificity of its sustainable finance focused on clean technology and renewable and whether they actually represent a commitments. energy transactions that directly support bank’s efforts to drive real change in their Later in 2019, BMO published a the transition to a low-carbon economy. business practices. Given that it’s so difficult, sustainable financing framework that aligns The company also detailed its commitment we developed the framework to help with the International Capital Market to transparency in its methodology for stakeholders interpret the commitments and Association’s (ICMA) 2018 Green Bond accounting, project inclusion, and the make sense of them.” Principles, committed CA$3 billion ($2.3 carbon intensity of its credit portfolio, Bank of Montreal (BMO) came bottom billion) in capital available to women-owned and will regularly report on the social,

Environmental Finance | Winter 2020 19 Cover story

environmental, and economic impacts of the rages with particular ferocity when it comes of initiatives such as the Platform for lending. to the big US banks. In September this year, Carbon Accounting Financials (PCAF), “Since the announcement there’s been an Morgan Stanley became the first major which counts numerous banks among its evolution of our sustainability work and a US bank to commit to a net-zero financed signatories. Paris alignment pledges are also desire for us to communicate our leadership emissions target by 2050. a key ask of the Principles for Responsible goals and aspirations around sustainability,” However, the net-zero commitment Banking (PRB), which has over 190 says Mary Wenzel, head of sustainability and was criticised by NGOs BankTrack and signatories, just one year after being formed. corporate responsibility for Wells Fargo. The Sierra Club for not including interim Citigroup is the only one of the six largest “We’ve also been working with some extra targets or plans to phase out fossil fuels or American banks to be a signatory to the external stakeholders to vet our accounting deforestation. PRB. methodology, as we wanted to be very On why Wells Fargo is not signatory to transparent in our approach.” “52 out of 58 the PRB, Wenzel says: “When the PRB was introduced last year we were really waiting But what about fossil fuels? stakeholders we until we began the process of resetting Another high achiever, according to WRI, our public commitments to think about was HSBC, which in 2017 pledged to consulted concluded which collaborations and partnerships were provide $100 billion in sustainable financing that ‘science-based appropriate, and so we hope to approach and investment by 2025, a commitment that in a holistic manner.” which ticked all six of the boxes for a specific targets’ should only This year Deutsche Bank, a signatory and accountable pledge. to the PRB, tightened its fossil fuel policy However, HSBC’s beefed-up be considered to be to include exiting coal mining investments commitment in October 2020 to reduce achieved when they by 2025, and restricting oil and gas sector financed emissions from its portfolio of financing by the end of 2020, with the aim customers to net zero by 2050 or sooner, in lead to GHG emissions of “reducing” its fossil fuel exposure. line with the goals of the Paris Agreement, However, Deutsche Bank will not publish did not receive the same warm treatment reductions in the real targets on the decarbonisation of its portfolio from a number of NGOs. HSBC faced economy” until 2022. For that, the bank faced NGO criticism for a perceived lack of definable criticism, with German environmental targets within its pledge, and a lack of Jakob Thomae, 2DII not-for-profit Urgewald countering that: detail as to exactly how its portfolio will “Deutsche Bank seeking to limit its fossil become aligned with the targets of the Paris It was a similar story for JP Morgan businesses is a much-welcomed step Agreement. Chase, which pledged to align its financing forward. From a climate perspective, There were also accusations of hypocrisy with the goals of the Paris Climate however, this is still too little, too late. We on fossil fuel financing, as the bank still Agreement but was criticised for a lack of would have needed significantly more has money tied up in East Asian mining commitments on fossil fuels. It was revealed ambition in the year 2020.” companies, for example. as the biggest financer of fossil fuels by a Gerald Podobnik, chief financial officer Nina Roth, director of responsible report compiled by a collaboration of NGOs for the corporate bank at Deutsche Bank, investment at BMO Global Asset including Rainforest Action Network and says: “[Sustainable finance] has become Management, says: “Such announcements BankTrack published in March 2020. of major strategic importance for the are great to indicate the direction of travel company.” [for HSBC]. But there is a clear need for Paris alignment He points out that the bank this year also more substance in their implementation. Banks argue that the NGO focus on fossil became signatory to the Equator Principles, “Whilst the announcement is detailed fuel divestment is too simplistic. seventeen years after their inception. when it comes to pledges to provide Paris- HSBC, for example, has said that gas The principles are a risk management aligned finance to clients, we still need more still has a key role to play in the transition framework, adopted by financial institutions, information on what they won’t do anymore. to a low-carbon economy. It sees its role for determining, assessing and managing I’m particularly thinking of their coal as engaging with its clients to help them environmental and social risk, primarily in portfolio. With HSBC’s large presence in transition away from carbon-intensive emerging markets. Asia, it will be most interesting to see what it business models, to those that are in line One reason for banks taking time to means for the regional extractives portfolio.” with the Paris Agreement. become expressly Paris-aligned is the The issue of whether banks have set Banks are beginning to weave alignment difficulty in establishing a clear, agreed-upon targets to reduce their exposure to fossil with the Paris Climate Agreement into their methodology for defining exactly what it fuel and other dirty sectors, has been a sustainability pledges. means for a financial institution to adhere common theme in NGO criticism of banks’ While few banks have explicitly made to net zero goals, with the International sustainability commitments. This debate such a commitment, this is the aim Finance Corporation, part of the World

20 Environmental Finance | Winter 2020 Bank Group, having previously declined to director of the 2° Investing Initiative (2DII), scenarios across climate-relevant sectors and confirm whether it is Paris-aligned, arguing an organisation that in the past has been technologies. that the methodologies for making such a at odds with the SBTi over whether it is The Netherlands-based ING Bank has claim are ‘still evolving’. currently possible to establish whether a a loan book of over €600 billion ($700 The World Bank has, as yet, declined to ‘science-based target’ has been achieved, billion) across many sectors, which it has make a specific Paris-aligned pledge. As said of the SBTi framework: “52 out of ‘begun steering’ towards meeting the Paris part of a joint statement by Multilateral 58 stakeholders we consulted concluded Agreement’s two-degree goal, through Development Banks prior to the COP 25 that ‘science-based targets’ should only be its ‘Terra’ approach, using the PACTA climate event in 2019, while committing to considered to be achieved when they lead methodology to assess its portfolio. helping clients deliver on the goals of the to GHG emissions reductions in the real ING’s approach focuses on the sectors Paris Agreement, the World Bank noted economy. in its loan book that are responsible for that principles for intermediated financing most GHG emissions: power generation, activities were still under development and fossil fuels, automotive, shipping, aviation, will be presented by the time of COP 26, “You need to eventually steel, cement, residential mortgages and now delayed by one year to November 2021. abandon these fossil commercial real estate. The PACTA The bank has, however, pledged to double methodology for corporate lending assesses its climate finance over its current five-year fuel clients, rather than the technology shift that is needed across commitment, with plans to direct $200 certain sectors to slow global warming, then billion to climate-related projects between stand with them, or measures this against the actual technology 2021 and 2025, and $50 billion of that total to have a very strong clients are using. to climate change adaptation. In October 2020, ING Bank released its conversation with them second Terra progress report – its first to use Are science-based targets the an- that their future is not in the PACTA methodology on its upstream swer? fossil fuel financing portfolio. Following External frameworks are arguably needed to oil and gas at all, but in a 2017 commitment by the bank, the help give credibility to banks’ claims of Paris trajectory for the financing of thermal coal alignment. renewables” was sharply downward, on course to drop to In October this year, the Science- Johan Frijns, Bank Track zero by 2025. Based Targets initiative (SBTi) launched However, the financing for oil and gas a “breakthrough” pilot framework for only showed a gradual downward trend, financial institutions to set science-based from current levels of €4 billion, down to climate targets, but some campaigners “The framework released [by the SBTi] €3.9 billion in 2030, and €3.2 billion in perceived shortcomings. means that targets can be considered to be 2040. The SBTi – a collaboration between achieved simply by rebalancing a portfolio, Michiel de Haan, global head of the the CDP, UN Global Compact, WRI and without necessarily any real-world effects.” energy sector at ING, stated its position World Wide Fund for Nature (WWF) – said The 2DII has its own Paris Agreement was in line with the International Energy the framework provides banks and other Capital Transition Assessment (PACTA) Agency’s (IEA) Sustainable Development financial institutions with the first tool to methodology, available since 2018 as an Scenario for transition, and that they would help them set science-based targets to align online tool for equities and fixed income tighten these targets if these IEA conditions their portfolios with the goals of the Paris portfolios. In September 2020, 2DII were to be ‘sharpened’ in the future. Climate Agreement. launched PACTA for Banks, a free, open- Additionally, the bank claimed that while To qualify for validation, direct Scope source climate scenario analysis toolkit for finding no place for coal in the current 1 greenhouse gas (GHG) emissions and corporate lending portfolios. It enables energy mix, there is a place for oil and indirect Scope 2 emissions – covering users to measure the alignment of their gas for the foreseeable future under the operational and purchased energy emissions corporate lending portfolios with climate Sustainable Development Scenario, and – must be in line with an average linear reduction rate of 4.2% for a 1.5°C pathway What are investors asking for? and 2.5% for a “well-below” 2°C pathway, In 2019, Boston Common Asset Management, engaged 58 of the world’s largest banks, according to the SBTi. including the likes of HSBC, JP Morgan Chase, BNP Paribas and MUFG. Scope 3 emissions – covering those The exercise identified some progress in terms of governance, with a majority of banks produced through the use of products and endorsing the TCFD guidelines (69%), disclosing TCFD governance reforms (71%) and carrying out climate risk assessments (78%). services – must also meet specific criteria However, the research showed these tools are not necessarily impacting on decision making, relevant to each class. with 40% of banks failing to develop any new financing or investing exclusions/restrictions as a However, even the SBTi faces questions result of their climate risk assessments. over its credibility. Jakob Thomae, managing

Environmental Finance | Winter 2020 21 Cover story

A selection of bank commitments so far

Bank of America HSBC Bank of America committed to mobilising an additional $300 billion in HSBC has committed to providing $100 billion in sustainable financing capital through its Environmental Business Initiative between 2020 and and investment between 2017 and 2025. The commitment is 2030. designated for developing clean energy, lower carbon technologies, and The finance is designated for promoting low-carbon and sustainable projects that contribute to the delivery of the Paris Climate Agreement business and, more specifically, to advance “Sustainable Energy and and the UN Sustainable Development Goals (UN SDGs). Transportation, Climate Resiliency, Clean Water and Sanitation.” In September 2020 HSBC also pledged to reduce financed Total commitment: $300 billion emissions from its portfolio of customers to net zero by 2050 or sooner, Average annual fossil fuel finance (as of 2019): $36 billion in line with the goals of the Paris Agreement. Total commitment: $100 billion Bank of Montreal Average annual fossil fuel finance (as of 2019): $19 billion In June 2019, BMO Financial Group announced commitments to ‘support a thriving economy, sustainable future and inclusive society’. JP Morgan Chase According to the bank, by 2025, BMO will mobilise CA$400 billion ($309 In October 2020, JP Morgan Chase, which earlier this year was revealed billion) for sustainable finance, increase support for small businesses by a collaboration of NGOs including the Rainforest Action Network and and women entrepreneurs, and commit to ‘zero barriers to inclusion’. BankTrack to be the world’s largest financier of fossil fuel projects since Total commitment: $309 billion 2015, pledged to align its financing with the goals of the Paris Climate Average annual fossil fuel finance (as of 2019): $18.9 billion Agreement. Total commitment: $200 billion BNP Paribas Average annual fossil fuel finance (as of 2019): $65.2 billion BNP Paribas said in May 2020 it is speeding up its timetable ‘for a complete exit from coal’, expanding to all OECD countries its target to Morgan Stanley end the use of coal by its electricity-producing customers by the end of In September this year, Morgan Stanley, which sits on the PCAF 2030. steering committee, became the first major US bank to commit to a Reclaim Finance, BankTrack and Friends of the Earth France said the net-zero financed emissions target by 2050. updated policy “reflects a level of ambition far short of best practices However, the net-zero commitment was criticised by NGOs set by such peer financial institutions as Crédit Agricole, Crédit Mutuel, BankTrack and The Sierra Club for not including interim targets or plans ... and other financial players.” to phase out fossil fuels or deforestation. The bank was encouraged to The bank also aims to provide €180 billion in financing to sectors that adopt the SBTi methodology to increase the consistency and clarity of contribute to the UN SDGs, with an increase of €10 billion on average its approach. between 2018 and 2020. Total commitment: $250 billion Total commitment: $211 billion Average annual fossil fuel finance (as of 2019): $22.3 billion Average annual fossil fuel finance (as of 2019): $17 billion Wells Fargo Citigroup In April 2018, Wells Fargo announced it will provide $200 billion In February 2015 Citigroup was one of the first global banks to make in financing to sustainable businesses and projects by 2030, with a significant sustainable financing pledge, in this case a commitment more than 50% focused on clean technology and renewable energy to lend, invest and facilitate a total of $100 billion over 10 years to transactions that directly support the transition to a low-carbon finance activities that reduce the impacts of climate change and create economy. The company also detailed its commitment to transparency environmental solutions that benefit people and communities. Predating in its methodology for accounting, project inclusion, and the carbon the Paris Agreement, this commitment cannot be seen to align to it, intensity of its credit portfolio, and will regularly report on the social, although Citigroup is also a signatory to the PRB which commits to a environmental, and economic impacts of the lending. path to alignment with the Paris Agreement. Total commitment: $200 billion Total commitment: $100 billion Average annual fossil fuel finance (as of 2019): $50.5 billion Average annual fossil fuel finance (as of 2019): $43.2 billion Any figures for average fossil fuel finance come from the World Resources Institute

focus should be placed on encouraging market disruption. That doesn’t sound as Terra Report, a level of accountability still transition within these providers rather than if they get the message that you need to rare among the world’s largest banks. divestment. eventually abandon these clients, rather than ING has also created a ‘Climate ING expects a relatively sharper decline stand with them, or to have a very strong Alignment Dashboard’, which shows the for oil, and while gas as a bridging fuel will conversation with them that their future is pathway of ING’s loan book towards climate more gradually decrease, it foresees an not in oil and gas at all but in renewables, alignment. The dashboard shows each increase to its natural gas funding in the and that they have to move.” sector’s carbon intensity and whether it is: immediate future. Fossil fuels remain a small part of ING’s • outperforming or on track with the Johan Frijns, director of NGO Bank bank overall mix: $4 billion of a total $980 relevant climate scenario, Track, says of ING’s approach: “I think the billion in assets. Much of what criticism can • not on track with the climate scenario but message here is that ING will stand by its be levelled against ING is also only possible outperforming the market, or oil and gas clients as they navigate through due to information publicly disclosed in its • performing below the market or two- 22 Environmental Finance | Winter 2020 Banks and total assets $80B $160B $240B $320B Mitsubishi UFJ Financial Group ($2.79T)

JPMorgan Chase & Co. ($2.53T)

HSBC ($2.52T)

BNP Paribas ($2.36T)

Bank of America ($2.28T)

Crédit Agricole Group ($2.12T)

Wells Fargo & Co. ($1.95T)

Citigroup ($1.84T)

Barclays ($1.53T)

Société Générale ($1.53T) Total commitment Lloyds Banking Group ($1.1T) Annualized commitment Royal Bank of Canada ($1.04T) Clarity of commitment Toronto-Dominion Bank ($1.03T) Less More ING Groep ($1.02T)

Goldman Sachs Group ($0.92T)

Morgan Stanley ($0.85T) Banco Bilbao Vizcaya Argentaria ($0.75T) Commonwealth Bank of Australia ($2.53T) Australia & New Zealand Banking Group ($0.7T) Westpac Banking ($0.67T)

Standard Chartered ($0.66T)

National Australia Bank ($0.62T)

Bank of Montreal ($0.59T)

$80B $160B $240B $320B Note: The green bars are total commitments over varying time Analysis of bank sustainability commitments by the World Resources Institute periods, and are therefore not directly comparable.

degree pathway identified. reduction targets into the structure of the Deutsche Bank’s Podobnik said: “I would Leonie Schreve, global head of sustainable loan or the bond provided.” caution not expecting too much from the finance, ING Global, says: “The Terra financial sector. With our financing decisions report really shows what is our exposure Reflecting the economy around them and our product offering we tend to play into nine different sectors which are the Some bankers will privately argue that while a role which tends to be significant, but we most greenhouse gas intensive, and how they have an important role to play in the cannot be the only ones. are we doing compared to the markets transition to a low-carbon economy, they “There will always have to be political and compared to our goal to achieve the cannot be expected to drive it. frameworks and such things that are outside alignment with the Paris agreements. Their loan books will, to varying extents, our remit. We play our part, and you will see “We also actively also work with our reflect the economies to which they lend, that there’s clearly upside to all the efforts of clients on specific transactions, on occasion and it is ultimately down to policymakers to the last couple of months. I think what we’re for example integrating carbon emission change companies’ behaviour, they argue. doing is definitely not unambitious.”

Environmental Finance | Winter 2020 23 Natural capital

‘The time is right to invest in natural capital’

How does HSBC Pollination Climate Asset Management aim to attract large-scale investment in natural capital, Michael Hurley asks

hen HSBC Global have done has been around natural capital – He tells Environmental Finance: “The Asset Management and such as the IFC-Conservation International- Natural Capital Financing Facility is a Pollination Group in BHP Billiton Forests Bond [issued in 2016 pioneering project, but it’s very small-scale, a August revealed their to raise $152 million]. lot of it is done with blended finance. joint venture, they “When we started discussions with HSBC “What I often heard, especially from announcedW their intention “to create the about possible solutions in the climate space, larger investors is: ‘It is so small we just world’s largest natural capital manager we discussed various areas, but settled on can’t invest.’ Where we try to position this [and] to mainstream natural capital as an natural capital. [HSBC-Pollination joint vehicle] and where asset class”. “Particularly in Australia, New Zealand we see the niche in this market is between HSBC Pollination Climate Asset and California, where you have a growing the smaller impact-focused funds and Management, through the creation of focus on regenerative agriculture, investors the really large forestry and agricultural private funds, aims to catalyse investment often say: ‘We want to invest in nature, but funds, which are not there yet in terms of into the world’s stocks of natural assets, such we don’t know how.’ embracing the natural capital aspect. as geology, soil, air and water, by attracting “Throughout the [fundraising and “HSBC immediately got that. They want commitments from some of the world’s approval] process, many investors told us to show the joint vehicle to their investors – largest institutional investors, including Covid-19 has made clear to them, more than large institutional investors: pension funds, sovereign wealth funds, pension funds anything else, the absolutely fundamental sovereign wealth funds.” and insurers. It will invest in emerging and need to focus on climate and nature. developed markets. “The timing is right – the EU said The joint venture This contrasts with most existing natural recently, we have to invest trillions in The joint vehicle is funded by Pollination capital-themed funds, says Martijn Wilder, nature, and we are seeing constantly the and HSBC, and is capitalised to support an a founding partner of Pollination Group, importance of nature in terms of resilience executive team to grow the business. For which in addition to investments provides and adaptation, for example with Covid-19. compliance reasons, the joint vehicle will be law, policy and corporate climate advisory These are the sorts of trends we would like managed separately from Pollination’s main services. Most natural capital funds are to tap into.” business. small-scale and can find it challenging to Martin Berg, a partner at Pollination Christof Kutscher, former global chair attract commitments from large institutional Group, is a former head of the European of AXA Investment Managers, is a senior investors, he observes. Investment Bank (EIB)’s environmental advisor to Pollination Group and executive Wilder, who was previously head funds and climate finance policy unit, where chairman of the HSBC joint venture. Berg of law firm Baker McKenzie’s global he led investments into sectors such as will also advise the joint vehicle. environmental markets and climate change natural capital and the blue economy, and HSBC will provide seed funding to help practice, tells Environmental Finance: “Over supervised the development of the Natural grow the natural capital fund, Berg said, but the last 10-15 years, a lot of the work [the Capital Financing Facility, a joint EIB and declined to specify how much this might members of Pollination’s management team] European Commission initiative. amount to. He said the real asset fund, which

24 Environmental Finance |Winter 2020 could be the first of many to be launched “To get to that ‘other end’ – the more under the joint vehicle, is expected to reach difficult end – is going to take more time, but first close by the middle of next year. sometimes it can be incorporated into the “We are having detailed discussions other investments. You can do investments with investors before we go out with a in agriculture or forestry that help increase formal proposal. We have an idea of how to biodiversity. Over time, as the biodiversity structure the vehicle, but we are in listening markets increasingly emerge, standalone mode. investments in those will materialise more “We imagine the fund will focus mainly and more. on regenerative agriculture and sustainable “It will be fantastic if, in the coming years, forestry, as a core strategy. We would also there will be more of these funds. We need like to have a frontier strategy focused on trillions of dollars to flow into nature over some of the more challenging projects in the next years.” natural capital.” Wilder admits it will involve a concerted The exact geographical scope and the effort to convince large institutional investors relationship between the core and the of the fund’s potential, both for attractive frontier strategy depends a lot on the returns and positive impact. feedback from investors, Berg says. “In the way that we are presenting it, this According to Pollination’s website, is a new asset class. Even though everyone other investment themes might include continuously says how interested they Oceans (including sustainable fisheries, “Many investors told are in natural capital and how much they coastal restoration and blue carbon), and want to invest in it, we are going to have to Biodiversity and wildlife protection and us Covid-19 has made convince people. We are working very hard restoration. developing a pipeline to show there are good clear to them, more investments out there that can do this.” The natural capital challenge than anything else, the Wilder says that the breadth of opportunity Impact measurement to invest in natural capital makes it a absolutely fundamental As a fund aiming to create positive challenging area to grow. impact alongside financial returns, impact “At one end of the natural capital need to focus on climate measurement will be particularly important, spectrum you’ve got regenerative and nature” Berg observes. agriculture, forestry and fisheries; at the Pollination aims to quantify the potential other end you’ve got biodiversity and Martijn Wilder, Pollination Group for natural capital value creation at the start wildlife. of each investment. It intends to develop

Environmental Finance | Winter 2020 25 Natural capital

HSBC: The vehicle meets growing investor demand for natural capital Environmental Finance asked Melissa McDonald, head of responsible investment at HSBC and a board member at HSBC Pollination Asset Management, what the bank hopes to gain from the collaboration.

EF: What is HSBC’s role in the joint vehicle? MM: The joint venture will leverage HSBC’s reach and expertise as the world’s best bank for sustainable finance and the Pollination team’s 20-plus years of experience in natural capital. In addition to providing resources for the joint vehicle along with Pollination, HSBC intends to become a cornerstone investor in the first fund.

EF: What was HSBC’s motivation to join? Why natural capital in particular? Where are the biggest opportunities to invest in natural capital? MM: The joint vehicle aligns with HSBC Global Asset Management’s long-held commitment to sustainability and to actively improving the societies it exists in. Coupled with that, HSBC Global Asset Management is also focussed on building its alternatives capability ... HSBC’s partnership with Pollination helps it tap into market expertise as well as [Pollination’s] deep technical expertise and existing deal pipeline. The joint vehicle will meet growing investor demand. To reach the goals set out in the Paris Agreement, we need to find and fund new approaches that protect nature. We regularly hear from institutional investors and organisations looking for “We see the natural investment opportunities that mitigate long-term climate risk – but they simply haven’t existed at the scale required. This venture aims to solve that problem. In natural capital, we’re accelerating capital niche as between investment in an asset class that can help combat climate change and build biodiversity while the smaller impact- also generating long-term returns for institutional investors. EF: How else is HSBC active in the field of impact investing? focused funds and the MM: HSBC Global Asset Management is accelerating its activities in this space having launched its low-carbon equity and bond funds and the recent launch of the Real Economy really large forestry and Emerging Markets Investment Opportunities Funds (REGIO) [$474 million bond fund, in May] in agricultural funds” partnership with the IFC, part of the World Bank Group. Martin Berg, Pollination Group impact and, whether it is a large sovereign The emissions reductions and carbon wealth fund, or an impact investor, we want offsets that LNG sellers to Pavilion might everybody to look at this fund.” offer with their cargoes could include forest positive impact targets across six impact conservation or renewable power generation. areas. Progress against these targets will be A carbon fund on the cards Wilder says that when he founded monitored and reported using “an industry- While Pollination’s first fund as part of Pollination, it was not initially intended leading, proprietary impact measurement the joint venture with HSBC will focus on that it would start making natural capital tool”, according to Pollination. No further natural capital, Wilder says the organisation investments. details of this were available. is exploring the creation of a carbon fund at “The expectation initially was that, Berg adds: “In a further step, we have the an as yet unspecified date. over three years, we would build out ambition to apply evaluation methods to be The carbon fund could invest in large our approach to investments in various able to put a financial value on the natural landscape projects, or other emission areas. First, we started to looking at digital capital that’s being saved or created. reduction projects, “and we would pick infrastructure, large-scale renewable “Whether we can monetise this remains between five and eight countries very serious transformative energy and nation-building to be seen. It is certainly not something we about [carbon offsetting], and work with infrastructure, as it relates to climate change. sell to investors, but we do sell the fact that them to protect large amounts of nature, and Then the HSBC opportunity came along we have the ambition to do that, and we generate carbon reductions”. and all our focus went in that direction. believe in the long-term it is the only way Wilder says the demand for carbon offsets “Now we are taking a step back to environmental markets should work. As it from large corporates is high and rising. see what else Pollination could do in its stands, one of the obstacles is there is not “In April, Pavilion Energy, which is owned investment universe. We’ve been exploring enough data, not enough approaches to by Temasek, put out a tender to source whether we could launch a venture capital measuring that.” liquefied natural gas (LNG) [as much as fund. It is likely this would be focused on Yet Wilder says that while he does not 2 million tons of LNG a year for five years food and technology.” want the joint vehicle to be “pigeon-holed” from 2023]. They wanted that bundled Pollination has also created a not-for- as ‘impact’, “we want to be attractive to with carbon offsets. That’s indicative of the profit foundation with the ambition to impact investors. Our investments will have demand that’s coming.” develop climate-related projects.

26 Environmental Finance |Winter 2020 20% early bird discount – book before 5 February 2021 Environmental Finance subscribers receive a further 30% discount

Natural Capital Investment 2021 4 March 2021 Virtual Conference

Exploring the integral role that Natural Capital investment can play in building climate resilience

Some of the topics that will be discussed Discuss and network include: Meet other attendees through speed networking group video calls • Financial institutions’ exposure to nature-related risks • Scaling natural capital investments and building a market Share insights • Unpicking metrics and materiality for investors Participate in small break-out groups for a facilitated • Data deficiencies discussion by group video call • Impact measurements • Blended finance Gain high-value content • Task Force for Nature-related Financial Disclosures Hear from 30+ expert speakers and gain critical industry insights on a range of thought-provoking topics • The global governance and legislative agenda • Carbon, water and biodiversity offsets • Resilient supply chains Connect Meet with industry leaders through live Q&A, 1-2-1 • What is an investable project? video chat and messages

Between May and September 2021, we will also host Enjoy the on-demand experience a series of virtual thematic briefing afternoons that If you miss a session or want to refresh your memory on what was said, you can watch all the recordings on will cover the various opportunities and challenges demand for natural capital investments and includes thematic spotlights on biodiversity, water risk, oceans and the blue economy, forestry, agriculture and sustainable Be more sustainable land use. No travel, less costs, no expenses – reduce your carbon footprint!

For more information visit: www.environmental-finance.com/NCI21 Environmental markets buoyant despite pandemic

The coronavirus pandemic rocked the markets, but the environmental theme looks set to be a long-term winner, says Peter Cripps

he coronavirus pandemic So, commitments to environmental Meanwhile, the structural change in the wreaked havoc with the global policies seem to be strengthening, rather energy grid, as ever-cheapening renewable economy in 2020, pushing than falling victim to the malaise spread by energy comes online, displacing fossil fuels, businesses under and wrecking the pandemic. has not been reversed by the pandemic. government finances. That is good news for the carbon This has been positive for the market in TBut the traded environmental markets, markets, which look to put a price on renewable energy certificates (RECs). covered by Environmental Finance’s Market carbon and cap emissions of greenhouse Tim Pabst, managing director of STX, Rankings, have a different story to tell. gases. which won three awards, says: “Despite While not immune from the horrors of They are benefitting from buoyant Covid-19 and the overall decrease in Covid-19, they appear to have survived its sentiment. For example, Louis Redshaw, energy demand, renewable energy supply infection, and have emerged in rude health. CEO of Redshaw Advisors, expects the saw record growth in 2020,” propelled by That is mainly because they are driven EU’s Green Deal to lead to materially government policy and corporate demand by long-term trends such as climate higher prices of EU Allowances, “sooner for voluntary RECs. change, which have not been impacted by rather than later”. He adds that, if the more climate- the pandemic. Another contributing factor is the friendly policies of the incoming Biden It seems that action to tackle climate change in administration in the US. administration can be implemented change may have been hastened by the As David McCullough at Eversheds “it could accelerate renewable energy pandemic, as governments around the Sutherland puts it, a Biden administration development, especially by tackling world have understood that the recovery is expected to be “very favourable” for one of the biggest issues, the outdated needs to be a green recovery. carbon markets the US. infrastructure… we expect the federal

28 Environmental Finance | Winter 2020 The Biggest Winners in the 2020 Annual Market Rankings*

Element Markets

Karbone

Baker McKenzie GHG Markets pages 30-36 Evolution Markets

Redshaw Advisors Weather Risk pages 38-39 South Pole

STX Renewable TP ICAP Energy Certificates pages 40-44

*Stars indicate number of awards received. Colours of stars relate to categories as laid out on right of page. Catastrophe Risk pages 45 Overall, the growing weather market, which is seeing the types of products sold adapt to this new impacts of climate renewables-powered reality. change, the growing And the effects of climate change are not going away, leading to strong demand for How the rankings were acceptance that it is a ‘traditional’ weather hedges and weather- conducted: related cat bonds. Companies were emailed in October problem that needs to Overall, the growing impacts of climate and asked to nominate the leading be urgently addressed, change, the growing acceptance that it traders,brokers and service providers in is a problem that needs to be urgently the markets covering carbon emissions, renewable energy certificates, and and the fact the response addressed, and the fact the response to the weather and catastrophe risk, via an online pandemic offers an opportunity to do this, survey. They were asked to vote only in to the pandemic offers augur well for these markets. those categories in which they had direct an opportunity to do Many of the players which are experience and to make their judgements mentioned in the following pages – for on the basis of: efficiency and speed of transaction;reliability; innovation; quality this, augur well for these example, Element Markets, which also of information and services provided; won six gongs last year – have been and influence on the market, not just the markets plugging away at these markets for years, volume of transactions handled. More than and it looks like their dedication will be 950 completed responses were received. Only one vote per company site was government to step up in their own green increasingly rewarded for years to come. allowed and those firms that nominated procurement.” Congratulations to all this year’s themselves had their votes disregarded. This also has ramifications for the winners.

Environmental Finance | Winter 2020 29 Carbon markets resist 2020’s headwinds

Cap and trade schemes were not immune to the pandemic, but growing support for climate policies helped them recover, the winners of the 2020 Market Rankings told Annabelle Palmer

he effects of the Covid-19 pandemic have reverberated CATEGORY WINNER RUNNER-UP across financial and commodity EU Emissions Trading System markets this year, and carbon markets were no exception. Best broker, spot & futures Evolution Markets TWhile the impacts have been uneven in Best trading company, spot & futures Redshaw Advisors Vertis different regions, the overall trajectory is one of recovery. Best broker, options Evolution Markets Environmental Finance spoke with the Best trading company, options Vertis CF Partners winners of the 2020 Market Rankings to see how the events of the past year Best advisory/consultancy Redshaw Advisors ClearBlue Markets have impacted their regional compliance Best law firm Reed Smith markets, and what they predict for the year Best verification company SGS Swan Energy ahead. Intercontinental Exchange European Energy Exchange Best exchange/clearing house EU ETS (ICE) (EEX) “There never seems to have been a dull moment for carbon in 2020”, says Louis Redshaw, CEO and founder of Redshaw March has given way to an impressive emissions reduction target of 55%, up Advisors, which won two awards in the rally, with prices passing €30 three times from the previous 40% target. Proposals European Union’s Emissions Trading over the course of the summer. to achieve this include a lower supply System (EU ETS) market category – Best As of 27 November 2020, prices of allowances, additional sectors to be Trading Company, Spot & Futures and were hovering around €27, which is covered by the EU ETS – such as shipping Best Advisory/Consultancy. approximately 12% higher than at the end and buildings – and a carbon border As widespread lockdown measures were of 2019. adjustment mechanism (CBAM) from implemented earlier this year to halt the One reason for the impressive 2023 to better address the risk of ‘carbon spread of Covid-19, production levels bounce back was due to the European leakage’ – that higher compliance costs decreased across multiple sectors and, as a Commission’s (EC) plans for an EU would drive companies or operations to result, demand for EU allowances (EUAs) Green Deal. “This stopped Covid’s other regions of the world. plummeted. negative impact on the market in its The CBAM would put a price on the

In March, the price of the EUA Dec ‘20 tracks,” says Redshaw. CO2 content of imported products such as Futures contract fell as low as €14 ($17) Since it was announced in December electricity, steel and cement. per tonne of carbon dioxide (CO2) as 2019, it has renewed speculator interest in “There seems to be a strong support financial players liquidated their positions. the carbon market, and the medium- and of the CBAM among politicians and “[Speculators] panicked and some even long-term outlook remains bullish. corporates as well,” says Bernadett went short,” says Redshaw. In addition to a 2050 climate neutrality Papp, senior market analyst at Vertis Since then, the initial price crash in target, there was a strengthened 2030 Environmental Finance, which topped the

30 Environmental Finance | Winter 2020 GHG Markets

Project Credits (JI and CDM) category, policy support from Brussels for a long- term price signal for carbon has perhaps never been stronger. “If the world is to meet its net-zero ambitions then we need a higher price of carbon. Most governments and multilateral development banks have shadow carbon pricing well in excess of $100 per tonne,” he says. 2021 also marks the first year of a new trading period (Phase IV) for the EU ETS, which includes tighter rules on free allocations. Redshaw points out that most big emitters, such as steel companies, continue to be protected with generous free allocations in Phase IV. “The EU’s green deal “However, the prospect of a much higher emissions reduction target for 2030 “There seems to be will have to entail is likely to dramatically alter the Phase IV landscape, at some point,” he cautions. a strong support for materially higher EUA Another important issue for the EU the CBAM among prices “sooner-rather- ETS is Brexit, which continues to create uncertainty. On 1 January 2021, the politicians and than-later” UK will leave the EU ETS. The UK has corporates as well” Louis Redshaw, indicated that its preference is to set up a domestic ETS that would then link back Bernadett Papp, Redshaw Advisors to the EU system. However, given that Vertis Environmental Finance Brexit negotiations are still ongoing at the time of writing, it seems unlikely the link polls for Best Trading Company, Options will be established in time for 1 January. UK adopting a carbon tax and hopes an in the EU ETS market – a position it Even if there is a deal, Peter Zaman, ETS can be put in place: “Adopting a has held for four years in a row. “The partner at Reed Smith – and winner of carbon tax would be a deeply regrettable EU could also be a pioneer and motivate Best Law Firm in the EU ETS for the step backwards from the enormous other countries and regions to implement second year in a row, is not certain how progress the UK has made – and the carbon pricing.” quickly a linkage to the EU ETS could be leadership it has shown – in supporting The details of how the carbon content achieved. cap and trade schemes which are so of products from different countries will “[Assuming there is a deal that allows fundamental in allowing the market to be calculated is unknown. The EC is continuity] I think we are going to have put a price on pollution and, in doing so, currently drafting a law to align the ETS a period where the UK ETS operates in enable energy transition,” he says. with the Green Deal’s objectives and isolation, but in a consistent manner to In the meantime, the market is in wait- opened a public consultation on various the way that the EU ETS is operating, to and-see mode. measures on 13 November. Further details facilitate easier linkage under the terms of Francesca Cerchia, global product on the proposals are expected in June a Brexit deal – perhaps during the course manager of environment, health and 2021. of 2021 or thereafter,” he says. safety at SGS, winner of Best Verification Until then, “we wait with bated breath,” Papp at Vertis agrees that it is highly Company in the EU ETS category, says says Redshaw, but he adds that such unlikely that the UK ETS could start in verifications of UK installations for the measures will have to entail materially January 2021. 2020 reporting year are being carried out higher EUA prices “sooner-rather-than- “The infrastructure is not ready yet and under a ‘business as usual’ scenario under later.” the Treasury seems to prefer a carbon tax SGS’s United Kingdom Accreditation According to Gordon Bennett, instead. That would mean fast money for Service (UKAS). managing director, utility markets at the government. A link between the UK “However, as a result of the limited Intercontinental Exchange (ICE), which ETS and the EU ETS is therefore highly geographical coverage of UKAS won Best Exchange/Clearing House in the uncertain,” says Papp. accreditation, SGS had to re-allocate EU ETS and Best Exchange in the Kyoto Bennett at ICE is not in favour of the a series of pan-European verification

Environmental Finance | Winter 2020 31 GHG Markets

contracts to SGS affiliates in EU member states,” she adds. 35 North America North American markets have endured a 30 similarly volatile year. “We expected this to be a year of 25 solidification and growth,” says Randy Lack, founder and co-president of Element 20 Markets, which topped the rankings for Best Trading Company, Spot & Futures, 15 Best Trading Company, Options in North American markets (California) and Best 10 Trading Company in North American markets (RGGI) and Best Advisory/ 5 Consultancy in North American markets (all). 0

Instead, optimism was replaced with 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 tremendous volatility and downward pressure on prices when Covid-19 hit the 2 April 20 2 May 20 2 June 20 2 July 20 2 March 20 2 August 20 2 January 20 2 February 20 2 October 20 US in March. 2 September 20 2 November 220 December 20 For the Western Climate Initiative (WCI) – the linked California and Quebec cap-and-trade programme – there was an Settlement Price on EU Emission Allowances 2020 (€) Source: Redshaw Advisors Ltd expectation that the California allowances would hold the auction floor price of $16.68. However, as funds in Europe and CATEGORY WINNER RUNNER-UP California liquidated, and WCI’s clearing agents increased margin requirements North American Markets (California) to manage volatility, California Carbon Best broker, spot & futures Karbone Evolution Markets Allowance (CCA) prices were driven to lows of $11.50. Best trading company, spot & futures Element Markets STX While CCA prices have since recovered Best broker, options Evolution Markets and are now trading at around the $17.20 Best trading company, options Element Markets STX level, California Carbon Offset (CCO) prices have not recovered, with the Best offset originator Bluesource Element Markets allowance/offset spread now at an all-time Best advisory/consultancy ClearBlue Markets Element Markets high. This is partly because of a rule change Best law firm Eversheds Sutherland starting in 2021 that reduces the usability of offsets in California from 8% down North American Markets (RGGI) to 4%. As a result, the market has an oversupply of offsets. It remains to be seen Best broker Karbone how long this will persist. Best trading company Element Markets Bluesource Michael Coté, president at Ruby Canyon Environmental, winner of Best Verification Company, North American markets (all), North American Markets (All) says: “It’s made some projects pause and Best advisory/consultancy Element Markets ClearBlue Markets reflect on the scale they were expecting to roll out future projects,” he adds. Best law firm Latham & Watkins Eversheds Sutherland Ruby Canyon He sees interest growing in projects Best verification company Aster Global centred around natural climate solutions, Environmental such as land use change and agricultural Best project developer Bluesource practices, however.

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“Even though they aren’t necessarily the market earlier in the year when a federal biggest in terms of delivering tonnes, I am judge rejected a Trump administration seeing a genuine interest in those kinds of lawsuit that was designed to put a halt to projects. We’re also seeing interest from US California’s cap and trade programme. oil and gas companies as to how they could The filing argued that the WCI’s linkage get some credit for methane reduction with Quebec represented an international projects within their portfolios – in areas treaty which cannot be enacted that are not regulated right now,” he says. independently by a state. Meanwhile, in the north-eastern US, The rejection of that lawsuit in July the worst effects of the market volatility was significant in terms of providing were tempered by the re-entry of New confidence to carbon markets. Jersey into the Regional Greenhouse Gas “It had the markets spooked a bit,” says Initiative (RGGI) cap and trade system, McCullough at Eversheds Sutherland. and the fact that lawmakers have initiated “Some investors were concerned that it processes for Pennsylvania, the US’s third could overturn the framework in place, biggest coal producing state, and Virginia negate credits that have been traded in to join as well. California and imported from Canada, and However, Coté says he had also hoped the value of their investment would either that more states, such as Washington and “The prevailing view disappear or be significantly negatively Oregon, would have joined the compliance is that Biden will be impacted. market by now. “It demonstrated that the courts would “They’ve repeatedly failed to very favourable to defend against the aggressive changes in get it across the line, so that’s been the political swings that can happen in the disappointing,” he says. the carbon markets” United States,” he says. More recently, the market received a David McCullough, boost from the recent US Presidential Eversheds Sutherland Kyoto Project Credits election results. The 1997 Kyoto Protocol and the While the ‘blue wave’ – whereby 2015 Paris Agreement are separate and Democrats won both the House will pass future legislation through a independent instruments of the United and Senate – didn’t happen, David Democratic or Republican-controlled Nations Framework Convention on McCullough, partner at Eversheds Senate. Climate Change (UNFCCC). Sutherland, and winner of Best Law Firm, If the Senate remains in the hands of As part of the Kyoto Protocol, North American markets (California), says Republicans, Lack at Element Markets UNFCCC’s Clean Development “the prevailing view is that Biden will be says he will be watching where the Biden Mechanism (CDM) allows emission- very favourable to the carbon markets”. administration can affect clean energy reduction projects in developing countries For now, the US awaits the results of the and sustainability policy without needing to earn certified emission reduction (CER) Georgia Senate run-off race, which will Congressional approval. credits, each equivalent to one tonne of decide whether the Biden administration Another political boost came to the US CO2. More recently, the focus and attention has shifted to the Paris Agreement, CATEGORY WINNER RUNNER-UP which will see countries implement their Kyoto Project Credits (JI & CDM) Nationally Determined Contributions (NDCs), leaving the fate of the CDM and Best broker, secondary market Enking International CERs unknown. Best trading company, secondary Enking International Redshaw Advisors “The future market for CERs remains market somewhat uncertain, but we continue to Best advisory/consultancy Kanaka Management Enking International see a role for these units – particularly Services in those emissions trading schemes that Best law firm Baker McKenzie recognise CERs for offset purposes. Best verification company EPIC Sustainability Services However, the CDM transition in the Best project developer Kanaka Management Enking International context of Article 6 of the Paris Agreement Services remains highly contentious in the Best exchange Intercontinental Exchange negotiations,” says Ilona Millar, head of (ICE) Baker McKenzie’s Global Climate Change practice, which continued its multi-year

34 Environmental Finance | Winter 2020 Market Insight

Leading through volatility Randy Lack, founder and co-president of Element Markets talks to Environmental Finance about how his firm has navigated the disruption carbon and renewable fuels markets experienced in 2020

Environmental Finance: What trends a price taker, which will result in significant have you observed in compliance and value erosion. voluntary carbon markets this year? Randy Lack: For Element Markets it was EF: With low carbon fuel programs a great year in the compliance markets, but such as California’s Low Carbon Fuel 2020 was a tough year for some traders in the Standard (LCFS) poised to expand, what California carbon market. opportunities do you see ahead? During the early part of the Covid-19 RL: California once again is demonstrating pandemic, the market shocked lower and wiped leadership in the environmental industry. out several speculators. That same ripple also Oregon has followed suit and now we have impacted carbon offset prices, with the offset Washington, Minnesota, Colorado, and most market getting knocked down by both covid- of the Northeast US looking at starting LCFS related market effects and the oversupply programs. This is resulting in robust growth for caused by the restrictions to 2% out-of-state all parts of the renewable fuels sector, especially offsets beginning in 2021. Having said this, it those with ultra-low carbon intensity such as feels like we are bottoming out as regards to renewable gas (RNG) from agricultural waste. both California carbon allowance (CCA) and As an example of the scale of investment we California carbon offsets (CCO) prices. are seeing, Dominion and Smithfield have The Regional Greenhouse Gas Initiative Randy Lack, Element Markets committed to spending over $500 million in (RGGI) has been quite a different story. While project development to convert swine waste we experienced a sharp downturn in March Industrial Revolution – are you preparing into biomethane. there was a quick V-shaped recovery with the for a similar set of initiatives in the US? These projects yield good returns while market now up over 25% YTD. We attribute RL: I love that Prime Minister Johnson refers making a real impact on carbon reduction this run-up to the addition of new states into to this as the Green Industrial Revolution, and with wonderful co-benefits such as decreased the program along with a premium in the President-elect Joe Biden introduced a plan nutrient loading in the waterways and odor market associated with the incoming Biden for a Clean Energy Revolution as part of his reduction. We expect a continued boom in the administration. While there was some hope campaign. A similar call to action is reflected in RNG space as market participants continue to that RGGI would converge into federal climate how Element Markets sees our role: our slogan convert landfills, wastewater treatment plants, legislation, that has been tempered following is “Leading the Clean Energy Revolution.” agricultural waste, and organic waste into a high November’s general election and the strong We have witnessed a fundamental shift in value fuel. possibility for continued Republican control the last year, with companies and institutions of the Senate (pending the outcome of the wanting to undertake decarbonisation initiatives EF: As you reflect on your strong Georgia runoff election). I think the market that make real, positive impacts. performance in this year’s Market overall will ride the momentum higher for some At Element Markets we see our role as Rankings, how is Element Markets time, especially if we see more states join in. not only leading this change, but enabling positioned to continue the momentum? In comparison, the voluntary market has that leadership for our clients; acting as a RL: I truly believe we have the best and been incredibly resilient this year and we have trusted resource in helping them understand most dedicated team in the US, and they are seen prices trend strongly higher driven by commodity markets and giving them the essential in growing and maintaining our client additional commitments by large corporations, confidence to make informed, strategic relationships. We have worked hard to cultivate universities, and utilities. We expect the demand decisions. Historically our clients shied away an environment of creativity, adaptability to to continue to increase. We are excited about from the regulatory risk of the environmental change, a focus on impact, and a fostering the future of the voluntary carbon market, and markets. We are now showing them how to of knowledge that we share with clients and we are laser-focused on new and innovative embrace the regulatory markets and use them regulators to propel this market further. We have pathways to bring large volumes of high quality as a tool to finance change. executed extremely well in the face of adversity supply to the market as well as investing in new Environmental commodities are a new in 2020, and I am proud to say that this turned projects under existing protocols. currency of business with upside opportunity out to be another year of consecutive growth for those who are early adopters. Corporations for the company. Element Markets is well EF: In the UK, Prime Minister Boris who don’t evolve or lag behind entering these positioned for the growth we see ahead in the Johnson has recently proposed a Green markets will fall behind their peers and become RNG, carbon, emissions, and LCFS markets.

Environmental Finance | Winter 2020 35 CATEGORY WINNER RUNNER-UP Chinese markets

Best advisory/consultancy ClearBlue Markets

Best Law Firm Baker McKenzie

winning streak for Best Law Firm in the government is reducing oversupply Kyoto market and topped the poll for without hurting companies, by reducing Chinese markets as well. benchmarks but also allowing for generous G Vishnu, quality manager of EPIC correction factors,” he says. Sustainability, winner of Best Verification Free allocations will be the primary Company in the Kyoto markets, is positive means of distributing credits, while China about the role the market will continue to Certified Emission Reduction (CCER) Gordon Bennett, ICE play in 2021: “We strongly believe that the offsets will also be allowed – up to 5% for Kyoto mechanism is the most matured compliance markets. mechanism, with an excellent technical Millar at Baker McKenzie says the expected to be catalysts for an international and working foundation, which is a potential for ETS participants to use a carbon market to replace the CER market, knowledge reservoir for future actions by small portion of offsets for compliance is of which over 3 billion tonnes is traded on the governments and society,” he says. encouraging. ICE. Covid-19 has impacted both; one Dr Madhukar, director of Kanaka She adds that another key feature which through the delay of COP26 and the other Management Services, which won Best the market is tracking closely is whether through the destruction of demand for Advisory/Consultancy and Best Project foreign investors will be able to trade in the airline fuel and the decision to utilise 2019 Developer in the Kyoto markets, says the scheme. as the baseline,” says Bennett at ICE. UNFCCC structure is “indispensable in “We have been encouraged by the recent The International Civil Aviation a multilateral setup” but he cautions that release of the updated allocation plan for Organization (ICAO) Council’s decision time is fast running out for “cheap credits the national ETS, along with the draft to use 2019 emissions as the baseline for like renewables where there is not much ETS rules and registry regulations, and CORSIA’s implementation during the real additionality”. are waiting with anticipation for trading pilot phase of 2021 to 2023 has been Instead, he is seeing a shift to nature- activity to commence, likely in early 2021,” controversial. If air traffic fails to recover based credits. she adds. to 2019 levels during this time, airlines will not be required to purchase carbon credits. Chinese market Looking ahead Despite these headwinds, Lack at The Chinese national cap and trade There are plenty of significant market Element Markets, says “it’s still an market, originally expected in 2017, is still developments on the horizon. One incredible market” and he is hopeful that yet to be fully implemented. key aspect will be clarification of rules post Covid-19, there will be resurgence in It had been hoped that it would finally surrounding Article 6 of the Paris air travel and that will lead to an increased be up and running this year. While that Agreement, the outcome of which will demand for offsets: “We expect at least has not happened, China has released an determine how countries can reduce their 550 million tonnes of demand coming updated draft proposal on how the ETS emissions using international carbon from the airlines by 2035,” he says would operate. Compliance has been also markets. He says that substantial investment is backdated to 2019. Discussions on the matter were expected required to meet the requirements of both The updates have been optimistically to take place at COP 26, which has been compliance regimes and CORSIA. received by the carbon market, says delayed by a year to November 2021. “We’re very bullish about offset Nicolas Girod, founding partner and In addition, the collapse in aviation fuel development opportunities: there are still managing director of ClearBlue Markets, demand was a disappointing turn of events a lot of credits out there that appear to be and winner of Best Advisory/Consultancy for those market participants expecting inexpensive relative to the demand we see in the North American markets airlines to be big buyers of carbon offsets on the horizon,” he adds. (California) and Chinese markets. as part of voluntary preparations for Such a picture means carbon markets “China is adopting policies that have Carbon Offsetting and Reduction Scheme are likely to attract further interest from worked for others, such as allowing for International Aviation (CORSIA), investors seeking to diversify portfolios China’s nine ETS pilot markets to operate ahead of a mandatory phase due in 2027. or use carbon to hedge against energy until 2025. Additionally, the Chinese “Article 6 and CORSIA were both transition risks.

36 Environmental Finance | Winter 2020 Osets Renewable Fuels Renewable Energy Climate Advisory Capital Investments Onsite Methane Reductions

For twenty years, we’ve pioneered straightforward solutions to the climate crisis. Best Project Developer (North America). Best Oset Originator (California). Six years running.

Celebrating 20 years Weather markets buoyed by renewables in turbulent year The growth of renewable energy has fundamentally affected approaches to weather risk. This year’s Market Rankings winners in the weather derivatives markets speak to Christopher Marchant

n a year when the Covid-19 pandemic sent stocks tumbling and CATEGORY WINNER RUNNER-UP masses of the population sheltered Weather Risk Management – North America from the weather by working from Best broker TP ICAP home, questions about how weather Best dealer/structured“Pull Quote” product seller MSI GuaranteedWeather Munich Re Iderivatives would adapt abounded. “The market has not just been resilient, but actually very active, with more work Weather Risk Management – Europe in the sector seen than in the previous Best broker TP ICAP 12 months, with a lot of new initiatives,” says Claude Brown, a partner at Reed Best dealer/structured product seller Munich Re Smith and a member of the firm’s global derivatives practice. “Activity on transactions has been quite strong in Weather Risk Management – Asia Australia, South America and in Europe. Best broker CQ Energy “Also, there’s been a lot of focus on the Best dealer/structured product seller AXA Caribbean, which has come as a result of the increasing severity of weather and Weather Risk Management – Australia climate change in the region.” Reed Smith was again voted best Best broker CQ Energy TP ICAP law firm category in the global weather Best dealer/structured product seller Nephila Swiss Re management category, the latest in a line of consecutive victories. Weather Risk Management – Global In 2019 TP ICAP expanded into the Parameter Climate weather derivatives market, led by Eric Best advisory/data service Speedwell Weather Ernst and his brother Nicholas Ernst. Best law firm Reed Smith Hired in April 2019, Nick joined as managing director, weather markets, and Eric as a weather broker. Covid-19 came and the economic in oil prices in early 2020, the energy This year TP ICAP was victorious slowdown started, you started to see a little mix showed early signs of a truly radical in the best broker category for weather bit less business coming through, because transformation, with implications for risk markets in both North America there wasn’t as much demand. However, weather derivatives traded in the sector. and Europe, after winning in the North most of our customers still had weather Marcel Reif, head of weather at Munich America category in 2019. risk, so it didn’t affect it as much as I Re, winner of best dealer or structured Both previously worked together at would say it has other marets.” product seller in the European markets, Choice Energy, which claimed the Best Renewable energy has seen a sustained says: “Many energy markets are currently Broker – North America title in 2018 and increase in its adoption rate over the past undergoing a period of structural change, 2017, evidence of the Ernst effect. twelve months, following a strong 2019, driven by the massive shift to renewable Of the impact of the pandemic on especially transactions related to solar energy production and technological the market, Nicholas Ernst says: “When and wind power. Coupled with a crash changes. This has resulted in new company

38 Environmental Finance | Winter 2020 Weather Risk

formations, novel business models and Charleston, South Carolina, part of increased M&A activity. an American South that experienced “As a whole, this transformed market more than $14 billion in damages after faces new or altered weather & commodity Hurricane Laura, the strongest tropical risk positions. Given the direct nature storm to have hit the mainland US in of our business, it is paramount to keep 150 years, wreaked havoc in the region in abreast of these developments.” August. David Whitehead, co-CEO of Speedwell, On how climate change and which beat off the challenge of upstart corresponding changes in weather are Parameter Climate to retain its title as impacting the weather markets, Whitehead winner of best advisory for weather risk says: “Climate change, in the context of markets worldwide, gives some specificities increased frequency of extreme weather, on how this has impacted the market in has made people very interested in weather 2020: “Originally, wind hedging would risk management. All you have to do is be in the form of a company that has look at headlines in any paper. a portfolio of wind power generation, “With climate change, the markets worried about weather patterns that were are expanding more into these climate not producing enough. That’s a very parameters. We’re looking at wildfire, simple hedge, but where the markets looking more at tropical products, we’re are getting exciting now is from market David Whitehead, Speedwell looking at atmospheric pollution visibility. participants that have been impacted by There are these environmental variables excess production coming into the grid regions. It has also developed in non- that are all coming into play in the same and impacting pricing. energy markets a business focus on market.” “All of a sudden, your traditional energy parametric index-based solutions and sees Summarising the Australian markets, participants have to care about wind farms, ‘significant opportunities’ in the sector. Dan Stilwell, head of origination at and needing to manage that risk through As well as global trends, specific areas Nephila Climate, again trumping weather products. It’s been a huge, huge have witnessed more localised effects of competition to be awarded winner of best growth segment of the market right now.” climate change, the rise of renewables and dealer or structured product seller for the Technological advances have also played an evolving marketplace. As runner-up in region, says: “A lot of what we do as a a huge part in updating the weather 2019 for best dealer or structured product business unit within Nephila Climate is to market for 2020, especially in the field of seller, Munich Re’s work in the continent focus on renewable energy temperature parametric weather modelling. gave it top spot in 2020. drought risk and agricultural risks of that Martin Malinow, CEO of Parameter On the European perspective, Reif says: sort. As the temperature gets hotter and Climate, runner up for best advisory “The increased occurrence of extreme hotter every year, we’re doing a little bit or data service in the weather markets, events raises awareness [of climate less on the temperature side and we’re expands on what this entails: “Over the change], but risk assessment and pricing replacing that with a lot more renewable last twenty years, protection sellers have has become, of course, much more difficult energy.” solely focused on the station to which as these events deviate significantly from While based in Australia, CQ the transaction was indexed, for example historical expectations, and innovative risk Energy, partnered with Risk Solutions London Heathrow, and they would transfer solutions are increasingly required. International, was also able to capitalise on consider the attributes of that station in “A good example is the increasing its wider global presence to be victorious their modelling.” number of European heat waves leading to in the Asian markets. On its role in the “What Parameter Climate is bringing low river levels. This has resulted not only Asian markets, Ian Tannebring, a partner to the table is actually looking at climate in shipping disruption, but also limited the at CQ Energy, says: “We have been for a trends regionally, not just at Heathrow but generation of thermal power plants who number of years inclined to focus on Asia across Western Europe. This also involves rely on the river for cooling water. The for various opportunities that may exist in analysing proprietary extreme weather economic losses from such events can be those markets. indices to better understand the general severe.” “We have a strong relationship with volatility of climate and then factoring that Increasingly extreme weather is, capital providers that offer options for into the risk analysis and pricing for our of course, not a uniquely European renewables. We are looking at rolling those clients.” phenomenon, and approaches to products into Asia, specifically Japan, CQ Energy, partnered with Risk confronting this issue are inextricably which has an inflation of renewables. But Solutions in an international joint venture, tied to addressing how climate change is it’s probably fair to say that it is early days, was named best broker in weather risk affecting the weather markets. and that these markets are still updating management for the Asian and Australian Speedwell’s headquarters are in their regulations in this area.”

Environmental Finance | Winter 2020 39 Renewable Energy Certificates

RECs Covid-19 rally ‘shows renewables momentum’ Covid-19 and the US election contributed to a turbulent year for RECs and RINs, winners of this year’s annual market rankings tell Michael Hurley

S markets for Renewable ‘Tier 1’ RECs – typically among the Energy Certificates (RECs) highest-value RECs, which consist of wind, rode out turbulence caused by landfill gas, low emissions biomass, run a global pandemic in a show of river hydro, and other fuel types – for of strength that demonstrates example, dropped from about $10-$11 Uthe dynamism of the transition to a low- prior to Covid-19, to between $6-$7, “but carbon economy, according to the winners soon regained their $10-$11 position”, of Environmental Finance’s annual market Burnston says. rankings. “However, a much more important By comparison, equivalent schemes barometer of the strength of renewables in other parts of the world, including in was the voluntary market. The national Europe, appear to have been hit harder Green-e market went from roughly a by declines in travel and corporate energy 70-cent product to what is now a roughly use as a result of Covid-19 – but have $1.50 product. nonetheless shown resilience, say this year’s “If it was not obvious before, it is now: winners. that the push towards renewable energy, RECs are a market-based instrument that decarbonisation, within the business certifies the bearer owns one megawatt- community and the investment community, hour (MWh) of electricity generated from is a secular trend: society wants this… a renewable energy resource. Once the “If it was not obvious [and] the market will have what it wants – power provider has fed the energy into the whether government guides that or not.” grid, the REC can then be sold on the open before, it is now: Tim Pabst, managing director of STX, market as an energy commodity. the push towards which was voted ‘best trading company’ In the US, where states implement for North American RECs, says: “Despite compliance and voluntary REC schemes, renewable energy and Covid-19 and the overall decrease in prices of the certificates dropped sharply energy demand, renewable energy supply in line with the initial shock caused by the decarbonisation is a saw record growth in 2020,” propelled by rapid spread of the pandemic between secular trend: society government policy and corporate demand March and May, but “bounced back very for voluntary RECs. quickly across all markets”, says Jonathan wants this” Pabst says that, if the more climate- Burnston, managing partner at New York- Jonathan Burnston, Karbone friendly policies of the incoming Biden based Karbone. federal administration can be implemented Karbone won ‘best broker’ and ‘best “it could accelerate renewable energy advisory’ for North American RECs renewable sources. Voluntary buyers development, especially by tackling markets. It was also voted ‘best broker’ for include corporates wishing to purchase one of the biggest issues, the outdated Renewable Identification Numbers (RINs RECs to offset carbon emissions associated infrastructure… we expect the federal – see box). with their purchased electricity, or to meet government to step up in their own green Compliance buyers are utilities or commitments for purchasing renewable procurement.” electric suppliers that are required by state energy. In Europe, “Covid-19 has had both regulations to have a certain percentage of In compliance markets, the PJM positive and negative effects,” says Anil their electricity generation or sales from (Pennsylvania, New Jersey, Maryland) Akalin, director of renewable energy at

40 Environmental Finance | Winter 2020 Market Insight

Renewable energy’s big moment Environmental Finance spoke with Patrick Horka, head of renewable energy solutions at South Pole about how the ‘big moment’ in renewable energy has arrived much faster than expected

Environmental Finance: How are in developing and deploying renewable energy companies utilising renewable energy technologies has been achieved thanks to solutions to work towards net-zero effective government policies, which overcome commitments and hedge against global economic, technical, and institutional barriers. climate risks? We see many markets moving towards Patrick Horka: A straightforward way for deregulation, allowing for companies to source companies to start an emission reduction renewable energy directly from the generator. pathway is to reduce Scope 2 emissions The levelised cost of energy (LCOE) of – indirect emissions from the electricity wind and solar dropped well below the LCOE’s purchased and used by the organisation. Many of fossil fuels, strongly increasing the demand of our clients start by compensating their Scope for direct procurement of renewable energy, 2 emissions with Energy Attribute Certificates such as via PPAs. (EACs), and then blend these with other Patrick Horka, South Pole solutions such as corporate power purchase EF: South Pole performed well in the agreements (PPAs) or on-site renewables, strategy is a key part of the company’s overall Australian and Chinese renewable energy depending on their energy demand and ambition to reach net zero emissions. certificates (REC) markets in our Market facilities. We analysed over 31 markets and developed Rankings in this year. What opportunities There are multiple benefits for incorporating three alternative pathways with a carefully do you see in these markets? renewable energy solutions into corporate planned combination of renewable energy PH: Asia-Pacific countries are being pushed climate strategies: price hedges, cost-savings, solutions. to hasten their transition to renewables, as big improving financial performance, brand and companies from Europe, the US, Singapore climate leadership, and contributing to positive EF: What’s driving demand for such and Japan work to lower their emissions and social impacts. The interest in the latter is solutions? procure renewable energy across their supply growing, and quality labels are becoming more PH: What we are seeing today is a disruptive, chains. We’ve also seen countries send positive important in EACs. exponential change taking place within the market signals to companies: China, Japan, and realm of renewable energy. It is getting tougher South Korea have recently set net zero targets, EF: How is South Pole helping companies every day for a business not to consider which clearly encourages companies to start with their climate strategies? renewables as a robust solution for containing shifting towards renewables sooner rather than PH: We offer everything from the energy costs, among other things. The ‘clean later – with RECs being the simplest and fastest implementation of strategy to tailored solutions supermajors’, such as Enel, Iberdrola, NextEra option for companies to use immediately. – green tariffs, EACs, corporate PPA’s, on-site Energy and Orsted, prioritised the building or Regionally, businesses in the heavy industry, renewables. In other words, our team is the buying of clean-power plants when those assets food and beverage, and the extractives sectors ‘one-stop-shop’ for organisations looking to were still considered alternative and expensive. are wanting to secure long-term renewable incorporate renewable energy into their climate Now they are on the cusp of a breakthrough energy offtakes. We also see the Asian market strategies. When engaging with our clients, our and their market caps have surpassed those of deregulating and giving way to alternative role is to make them aware of the risks and oil companies. energy solutions. opportunities of each solution. For example, This big moment in renewable energy has we helped one of our clients, a global beverage come much faster than expected. EF: To what do you attribute to your company, structure one of the first corporate success in these areas? PPAs in Vietnam. This will supply their local EF: What has helped the industry reach PH: We are a passionate team of renewable facilities with renewable energy from a newly its ‘big moment?’ energy experts sitting in offices all over the built clean power plant. We advised them PH: Corporate climate action pledges have world – we have our boots on the ground to throughout the entire process, from market been a key driver; such as the RE100 pledge, ensure best possible local market insight, and analysis up until the signature of a terms sheet. setting Science-Based targets (SBTs), work with a network of established partners. We also partnered with a high-tech, global and net zero commitments. RE100 signatories Our expert advisory capabilities paired with engineering multinational to develop a strategy alone consume more than a mid-sized country, our award-winning EAC projects allows us to to achieve 100% renewable electricity in its key such as South Africa or Indonesia. blend and customise the most innovative and markets by 2045, all while working towards its Stronger policy signals and regulation are impactful renewable energy solutions for our 50% emission reduction target by 2030. This also guiding the market. Much of the progress clients.

Environmental Finance | Winter 2020 41 Renewable Energy Certificates

Redshaw Advisors. The London-based firm was awarded best advisory for RECs in CATEGORY WINNER RUNNER-UP Europe. Renewable Energy Certificates – North America “Across Europe, whilst overall electricity Best broker Karbone output has dropped, the share of renewable energy in the power mix is rising … due Best trading company STX Element Markets to polices and market mechanisms valuing Best advisory Karbone Element Markets renewables more, and also the costs of Best law firm Akin Gump renewable energy dropping. The EU Green Deal and other policies will continue Renewable Energy Certificates – Europe this trend.” In the EU, Guarantees of Origin (GOs) Best broker STX Redshaw Advisors are electronic documents which provide Best trading company STX Redshaw Advisors proof of the environmental attributes of the Best advisory Redshaw Advisors ClearBlue Markets generation of one MWh of electricity by a renewable source. Renewable Energy Certificates – Australia In January, GO prices, as shown by the Association of Issuing Bodies (AIB), “took Best broker Natural Capital Partners TFS Green a dive and dropped from €0.50 to €0.23; Best trading company South Pole they never recovered their January start Best advisory South Pole price”, Akalin says. “GOs dropped from Best law Firm Baker McKenzie a starting point of €0.70 to a low over the year of €0.35. This drop was largely due Renewable Energy Certificates – China to Covid. However, oversupply of Nordic Best advisory South Pole hydro also hit prices. Best law firm Baker McKenzie “Polish generators are holding back on showing volumes for 2022 and onwards as Renewable Identification Numbers they anticipate joining the AIB. Whilst this Best broker Karbone Element Markets is keeping prices higher than they might otherwise be, the outlook is mainly bearish Best trading company Element Markets Bluesource and some suppliers, mostly from Spain and Best advisory Element Markets Karbone Italy, are sometimes not showing volumes because of low price bids. Best verifier EcoEngineers “The low prices on offer have helped Best law firm Eversheds Sutherland end-users buy more volume and hedge future increases in price. With corporates perceiving current prices as low, they are response to one client’s specific interest in Singapore and Japan work to lower their keen to lock in longer term deals. However, that area.” emissions and procure renewable energy most generators prefer to only show prices I-RECs are similar to RECs in North across their supply chains. for up to three years,” Akalin says. America and European GOs but are “We’ve also seen countries send positive Oliver Crouch, chief product officer at available for companies to source in market signals to companies: China, Japan, Natural Capital Partners, which was voted countries across Africa, Asia, South and and South Korea have recently set Net ‘best broker’ for RECs in Australia, says Central America and the Middle East. Zero greenhouse gas emissions targets, increasing voluntary demand for RECs John Davis, commercial director for the which clearly encourages companies to from large global companies, “particularly Asia Pacific region at South Pole, which start shifting towards renewables sooner in the IT and professional services sectors, was voted ‘best trading company’ and ‘best rather than later – with RECs being the wanting to cover their scope 2 energy use advisory’ for RECs in Australia, and ‘best simplest and fastest option for companies in all countries where they operate” has advisory’ in China, says: “Without a doubt, to use immediately.” bolstered demand in Australia. there has been more demand [for RECs] Davis adds that South Pole is planning to “As part of the same commitment and in the APAC region, due to Covid-19 grow its presence in the region – including interest from large global corporates, there’s prompting companies to pay more doubling the size of its Singapore office – to a continued growth in International RECs attention to supply chain resilience. meet growing corporate demand across (I-RECs). For instance, we worked with “APAC countries are being pushed Asia. [standard setting body] I-REC to help to hasten their transition to renewables, Paul Curnow, global head of Baker establish their tracking system in Israel in as big companies from Europe, the US, McKenzie’s sustainable finance practice and

42 Environmental Finance | Winter 2020 Market Insight

Connecting green energy markets

Jens Schumacher, managing partner of STX Group talks to Environmental Finance about how STX is working with its clients as the renewable energy revolution picks up pace on a global scale

Environmental Finance: Corporate from our portfolio of around 200 terawatt appetite to explore new kinds of renewable hours annually. energy products and certificates is We also know how different markets growing. What is driving this? operate, how they are developing, and we Jens Schumacher: There is both public have the network and experience to manage pressure and a feeling of responsibility. We cross-border issues. With the RED II law have seen a lot of interest by the corporates being implemented in Europe, this will help to this year. Many have not procured their energy standardise the renewable energy markets and certificates yet – because of the circumstances allow more cross- border transactions – on we are in with Covid-19 – but it remains high both the electricity and on the gas side. on the agenda. In Europe this year we will see one of the EF: What has been the impact of Covid-19 biggest changes in the energy market the on GoOs? European Union as ever experienced with JS: Energy demand was immediately the implementation of the Renewable Energy impacted by lockdown measures. Because less Directive II (RED2) and the European Green energy has been needed – but the supply of the Jens Schumacher, STX Group Deal. In the US, the new administration has renewables remained stable – we have seen the indicated the fight against climate change In other regions of the world there is a lowest prices in years. However, the renewable will be a top priority, so we expect similar standard commonly used called International energy revolution had already started before developments there as well. REC (I-REC). This seeks to create a certain Covid-19 came along and net zero strategies Wherever there is energy demand there is standard for Energy Attribute Certificates were already in place. In the short-term, the a transition to renewables ahead. This process (EACs) in countries where there is no national markets have been very bearish, but if you look will be easier for less-industrialised nations scheme available. at forward markets – especially the electricity where the renewables infrastructure can Standardisation and harmonisation are and EAC markets – there is a very bullish be set up from scratch, rather than having the most important elements that ensure outlook already. We expect already a strong to transition from fossil fuels to renewable credibility. When corporates believe that increase in demand in 2021 with even further networks as we have had to do in Europe and the purchase of such certificates is a viable increases in the following years to come. other industrialised nations. That phase has solution and there is a framework in place, not even properly started yet. then they are comfortable that what they are EF: You have performed particularly well doing is correct. If there is a standard, there in the European and North American EF: What are some of the challenges is a norm, and STX can provide companies regions in our Market Rankings this year. that corporates are facing with the with that solutions in line with these standards. To what do you attribute to your success ‘greenification’ of their supply chains and Scope 1 and 3 emissions are mainly being in these regions? how are you working with them on that? reduced using carbon offsets. This year, we JS: We have been providing solutions to JS: When reducing emissions, whether within have seen a strong increase in consumers the global markets for over 15 years now. scope 1, or 2 and 3, standardisation is probably addressing and approaching their supply In addition, we have local expertise, in one of the key elements here. Corporates are chain footprint. combination with a global reach. Our global requesting harmonised and reliable solutions network consists of independent generators, on a global scale. EF: You work with companies to buy project developers, investment funds, major In Europe, we have a Guarantee of Origins certificates but also to sell them. What are utilities, and corporates. We support, connect, (GoO) system, which is governed by the the advantages of doing both? and access a wide range of international EU and requires member states to issue JS: At STX, we add value for the buyer and opportunities, all through a single point of certificates of renewable electricity. With the the seller. For a possible seller – such as an contact. Recently, we also established a new implementation of the RED2, this system energy producer or maybe an investor – we a new initiative called Climate Solutions. will be extended to other renewable energy provide long-term offtake agreements for the It is totally dedicated to providing direct sources, such as gas, and likely even to non- energy certificates on a global scale. And for access to global markets as a single, reputable renewables. The USA have a similar system, the buyers – utilities and corporates alike – we partner and serving as one-stop-shop for called Renewable Energy Certificates (RECs). provide a great variety of solutions of EACs environmental solutions.

Environmental Finance | Winter 2020 43 Renewable Energy Certificates

global co-head of its renewable energy & Liable entities are obliged by legislation Nonetheless, “we are at a fascinating clean technology practice, says oversupply to purchase and surrender a certain moment in the renewable energy markets could hit prices in Australia, as the country’s number of large-scale generation in general. The price dynamics are now Clean Energy Regulator has indicated that a certificates (LGCs) each year. driving policy, as much as the other way national target of 33,000GWh of additional “It is likely that as the number of around,” Curnow says. “Australia has the renewable energy between 2020 and 2030 accredited projects – and, therefore, the world’s highest penetration of domestic will not be raised. number of LGCs created – under the rooftop solar. This is not because of a This is despite the regulator scheme increases, the value of LGCs renewables or climate policy so much as acknowledging that the target has already will drop considerably.” Australia’s Clean the simple fact that solar power has become been met, and the fact that new renewable Energy Council has said futures markets cheaper for household use in many cases.” energy power stations may still be indicate the value of LGCs may eventually Baker McKenzie was voted ‘best law accredited under the scheme. drop to zero by 2030. firm’ for both Australia and China. US election amplifies RINs uncertainty

Uncertainty reigns in the market for Renewable Identification more aggressive view on growth, instead of maintaining ‘status quo’ Numbers (RINs), as the agency responsible for setting compliance growth, and focus not only on propelling growth that will be needed requirements deferred to do so, due to November’s federal election, to support renewable natural gas (RNG) but also the growing supply says Susan Lafferty, a New York-based partner at Eversheds of new renewable diesel capacity that’s being planned in the US from Sutherland, which was voted ‘best law firm’ for RINs. refinery conversions. To implement the US federal government’s Renewable Fuel “Several companies have shut down large refineries and are Standard (RFS) programme, the Environmental Protection Agency looking to shift to renewable diesel, including Marathon, Phillips 66 (EPA) tracks production and use of renewable fuel using RINs. These and CVR. are generated by renewable fuel producers or importers and are “There is a significant amount of renewable diesel coming into the bought and sold “attached” to the renewable fuel until the fuel is market – which represents a direct drop in diesel fuel, as it can be purchased by an “obligated party” – a refiner or importer of gasoline used in its place – but the way the RVO is set, there is not enough or diesel fuel – or blended with a petroleum-based transportation fuel. depth in the D4 market, where renewable diesel sits, to absorb the The RIN is then “separated” from the fuel and may thereafter be volume coming on.” independently bought or sold until it is retired to meet an obligated party’s ‘renewable volume obligation’ (RVO). “We are hopeful that, under a Biden The Trump-administered EPA has in recent years granted increasing numbers of exemptions to some small refineries, which administration, the EPA will take a more mainly produce gasoline and/or diesel. Market observers suggest aggressive view on growth, instead of this has undermined demand for RINs. However, many of these were struck down in landmark legal cases over the last 12 months, which maintaining ‘status quo’ growth” led to a sharp increase in demand, this year’s winners say. Randall Lack, Element Markets At the time of going to press, the market was awaiting the EPA’s decision on the 2021 volumes of renewable fuel each obligated party will be required to blend into their fuel, or otherwise obtain RINs to demonstrate compliance. Lack adds that several states are likely to push ahead with plans to “The EPA was seemingly on track to issue the 2021 standards by establish schemes similar to California’s Low Carbon Fuel Standard the statutory deadline, which was November 30. They sent a draft (LCFS), whereby obligated entities can generate RINs as well as proposal to the Office of Management and Budget (OMB) in May – LCFS credits, including Colorado, Washington, and Minnesota. that’s the last step in approving a regulatory action. But that proposal In particular, California’s push to decarbonise the carbon-intensive has just been sitting at OMB,” Lafferty says. transportation sector is likely to be replicated in states with similar “We may not have final standards until some point in the second programmes. “There is now a massive amount of investment going quarter of next year, which is not a good place for the industry. The into renewable diesel and RNG, all predicated on confidence in the big uncertainty continues to grow.” renewable fuel and LCFS markets in the US,” he says. Lafferty adds that the outcome of the US election further Shashi Menon, CEO of EcoEngineers, voted ‘best verifier’, says: complicates the market. “Under a Biden administration, the “We don’t anticipate a dramatic change in the RVO growth from question would be, ‘are they going to really try to push the volume previous years. The real question is how the RFS will be integrated requirements and make them more ambitious?’ That’s where an into a larger climate programme under the new administration. There obligated party gets even more nervous. is no clear answer to that right now. “Will the 2021 RVOs see a modest increase, like expected under “Currently, the RFS is a combination of farm policy that supports the Trump administration, or is the new EPA going to really try to push biofuels and climate policy that incentivises decarbonisation of the for more volumes? Then comes the question, how do they factor in transportation sector. The new administration could continue with Covid-19 and presumed continued decreases [in activity] into next this agenda, or it is possible that these goals might bifurcate and be year. The uncertainty is not a good position to be in.” administered under separate programmes i.e., a climate strategy that Randall Lack, founder and co-president of Element Markets, voted lays out an overarching decarbonisation agenda will work in tandem ‘best trading company’ and ‘best advisory’ for RINs, says: “We with a farm policy that supports decarbonisation of the agriculture are hopeful that, under a Biden administration, the EPA will take a sector.”

44 Environmental Finance | Winter 2020 Catastrophe Risk

Creativity and transparency drives market forward The cat bond market is closing in on another record year, writes Ahren Lester

he catastrophe (cat) bond For example, Google-owner Alphabet market is closing in on a came to the market to secure Californian potentially record-breaking earthquake insurance protection. “If year, as tightened traditional similar large corporates follow suit, this reinsurance markets and could result in greater demand for capacity Tgrowing innovation draws in new and and diversified risk,” she says. established participants. The market is also “getting creative” Logan Davis Fox – underwriting and testing unique cat bond structures, director for the reinsurance division of Davis Fox says, with a cat bond providing Nephila Capital, the winner of Best dealer wildfire protection being marketed (structurer/arranger) for the third year in for a utility firm that uses a blend of a a row – says traditional reinsurance and parametric and modelled loss as a trigger. retro markets saw tightening terms and The rising appeal of parametric triggers rate hardening due to increasing storm helped newcomer Parameter Climate losses, an active hurricane season and (PC) to top the Best advisory category. complexities brought about by Covid-19. Logan Davis Fox, Nephila Capital Launched earlier this year by industry In contrast, the cat bond market has “fared veteran Martin Malinow, PC seeks to well” as it has been largely insulated from Willis Re senior vice president Quentin capitalise on the “rapidly growing” these ‘in the money’ events. Perrot says demand for cat bonds has parametric market of recent years. Willis Towers Watson (WTW) – runner benefitted from the unexpected losses Malinow – formerly president of Sompo up in the Best broker category – says that that investors have incurred on traditional Global Weather – says companies have in the non-life cat bond market, a rebound bilateral instruments which have left them become more aware of their climate risk in annual issuance means the segment is “trapped”. This trend has heightened and are looking for ways to try and address on track to hit record levels in 2020 – after the appeal of the more orderly losses this after the 2017 Atlantic storm season investors saw “increasing value” in cat experienced on cat bonds, in addition to saw three major storms hit in short order. bonds relative to other forms of insurance- the more transparent and liquid nature of “What was laid bare by that experience linked security (ILS) investments, which the bonds. was that it was difficult to loss-adjust for also includes collateralised reinsurance, Davis Fox says 2020 has been traditional indemnity products in any rapid sidecars and industry loss warranties. particularly active in the primary issuance manner,” he says. “It made a very clear According to data from Artemis, cat space, where there has been a record case for parametric products that could bond issuance has reached over $9 billion number of new bond deals. settle within days of the event.” Parametric in 2020 to date – considerably higher than “Many of these are returning sponsors bonds can be settled in 10 to 15 days. the $5.3 billion in 2019 and closing in on looking to renew maturing notes with Parametric products are also well suited the record $9.9 billion issued in 2017. Total similar structural features,” she says. to non-damage business interruption, ILS issuance, meanwhile, has crossed $14 “But, more interestingly, there are a large he says, as they provide a “very neat and billion – compared with $11 billion during number of new issuers coming to the objective” way of protecting against these the whole of 2019 – and represents the market for the first time – or the first time expenses. fourth year in a row that annual issuance in a long time – to take advantage of the In 2021, all three market participants has exceed $10 billion. current market environment.” expect the cat bond market to continue to grow – especially in the US, where disruption caused by Covid-19 has meant CATEGORY WINNER RUNNER-UP that many cedents were unable to get to Catastrophe Risk Management market in 2020. Perrot cautions that we should not Best dealer (structurer/arranger) Nephila Capital Swiss Re= Sompo Global Weather= expect the cat bond market to surge in Best broker TP ICAP Willis Towers Watson 2021 as it has in 2020, however, instead Best advisory Parameter Climate forecasting “healthy growth” led by “solid” investor demand.

Environmental Finance | Winter 2020 45 People moves

IIGCC appoints Ward as first female chair

he Institutional Investors Group on Climate Change (IIGCC) has appointed a new chair, vice chair and two new board members, following its AGM. Faith Ward – Chief Responsible Investment Officer at the Brunel Pension Partnership – will be IIGCC’s first female chair. TShe succeeds Peter Damgaard Jensen, CEO at Danish pension provider PKA, who stands down after seven years as a board member, three of which as chair. Torben Möger Pedersen, chief executive of PensionDanmark, has been appointed as vice chair. In 2020, the IIGCC has seen a 28% increase in membership revenue, with 74 new members. IIGCC now has 275 members in total, with over €35 trillion ($43 trillion) in assets collectively under management.

Faith Ward

Moody’s appoints global head of local government climate solutions pension schemes, has announced Moody’s has appointed Emilie Patrick Mazzacurati as global head of Moody’s O’Hara as its Climate Solutions. new director In this newly-established role, of responsible Mazzacurati will oversee the climate investment and solutions suite within Moody’s ESG engagement. Solutions Group, a new business unit O’Hara will formed earlier this year to serve the Rob Marshall Patrick O’Hara lead the LGPS’s growing global demand for ESG and responsible climate analytics. client demand for ESG-integrated, investment team, ensuring the area Mazzacurati is founder & CEO of sustainable and impact products and is further enhanced, expanded and climate data firm Four Twenty Seven, in develop the roadmap to meet M&G’s embedded as a core part of the company’s which Moody’s acquired a majority stake commitment to achieve net zero carbon investment and portfolio monitoring in 2019. emissions across its investment portfolios processes. by 2050. He was previously a senior responsible Marshall to lead new M&G Marshall previously led M&G’s credit investment analyst at UK pension fund stewardship and sustainability research team and more recently its global USS. team research equity and credit team. Templeton leaves GIG to join UK investment manager M&G has LGPS Central hires director Pollination created a stewardship and sustainability of responsible investment & team, to be led by Rob Marshall. engagement Gavin Templeton has left Macquarie’s According to M&G, the team of 13 Green Investment Group (GIG) to professionals will help meet increased LGPS Central, manager of eight UK become a partner at Pollination Group.

46 Environmental Finance | Winter 2020 investment management and member of Blackstone appoints ESG head the executive committee of PGGM, the second largest pension service provider Blackstone has appointed Eric Duchon based in the Netherlands. as global head of environmental, social and governance (ESG) for real estate. Janus Henderson creates head of The US private equity giant said ESG role for Aviva recruit Duchon will work with the firm’s real estate asset management teams around the world “to build on existing ESG efforts and scale them across the firm’s Gavin Templeton $329 billion global real estate portfolio”. Templeton had been head of Credit Agricole hires green bonds sustainable finance at the GIG, which analyst he joined in 2013 when it was the UK government-owned Green Investment Valentina Sanna has been appointed Bank. green bonds and ESG fixed income research analyst at Credit Agricole. Willis Towers Watson appoints Paul LaCoursiere Sanna was previously a sustainability senior director consultant and sustainable finance Janus Henderson has poached Aviva’s research manager at Vigeo Eiris (now Insurance brokerage Willis Towers Watson Paul LaCoursiere to lead its known as V.E.), in roles also based in has appointed John Firth as senior environmental, social and governance France. director for its climate and resilience hub. (ESG) investment strategy. Firth was CEO and co-founder of LaCoursiere is currently Aviva’s global Lora Brill joins Orchard Street as Acclimatise Group from 2004, a climate head of ESG research. head of responsibility & ESG resilience consultancy which now serves as part of Willis Towers Watson. Firth will Deutsche Bank makes Orchard Street continue as director of the company. appointment to ESG team in Asia Investment Management, a GIB Asset Management hires Neil Deutsche Bank has appointed Kalpana commercial Brown as head of equities Seethepalli as its Asia Pacific director of property ESG. investment GIB Asset Seethepalli joins the bank from impact manager, has Management has fund Infra-Tech Capital, where she appointed Lora hired Neil was managing director of sustainability Brill as its Brown as head and impact. She has also worked at the dedicated head of equities, World Bank as an economist, focusing on of responsibility joining the firm sustainable development and investment Lora Brill and ESG, a from Liontrust policy, blended finance and public-private newly created Asset partnerships. role. Management. Brill joins from JLL Upstream Brown will Zouk appoints Paul Myners to the Sustainability Services where she was be tasked board a strategic sustainability consultant, Neil Brown with helping advising a wide range of property GIB launch Zouk Capital, an infrastructure and companies over the last 10 years. sustainable equity products. private equity fund manager investing in the sustainable economy, has appointed Lightsource bp appoints global GIIN appoints Eloy Lindeijer to Paul Myners to the board. head of structured finance board Myners’ appointment will allow London-based Zouk to draw upon his Lightsource bp, the largest solar developer The Global Impact Investing Network wider ranging insights into multiple in Europe, has appointed Craig Love as (GIIN) has appointed Eloy Lindeijer as areas of interest, in particular ESG global head of structured finance. its newest board member. considerations within private equity He is former managing director of Lindeijer is the former chief of portfolios, the firm said. NatWest Structured Finance.

Environmental Finance | Winter 2020 47 Infographic

2020: the year the social bond came of age Social and sustainability bond600,000 issuance has soared in the wake of the pandemic 500,000

400,000

300,000

Annual issuance of green, social, 600,000

Issuance value ($M) 200,000 600,000 sustainability and sustainability-linked bonds 600,000 600,000 100,000 500,000 500,000 500,000 Chart showing the annual issuance of green, 0 500,000 2015 2016 2017 2018 2019 2020 social, sustainability and sustainability-linked 400,000 Green bond Social bond Sustainability bond Sustainability-Linked bond 400,000 bonds. 2020 issuance has grown significantly 400,000 400,000 as of 3 December 2020 compared with the 300,000 300,000 whole of 2019 continuing the trend of growth 300,000 300,000

seen in previous years. Notably however 120,000 Issuance value ($M) 200,000 180% 140,000 800%

Issuance value ($M) 200,000 Issuance value ($M) 200,000 the increase in 2020 so far has been the Issuance value ($M) 200,000160% 700% 100,000 120,000 expansion of social and sustainability bonds, 100,000 140% 600% 100,000 100,000 particularly social bonds which have seen a 80,000 100,000 100,000120% 500% 100% 80,000 400% rise in value of issuance of 675% already this 60,000 0 80% 300% 0 2015 2016 201760,000 2018 2019 2020

0 year. This is driven in part by a response to theIssuance value ($M) 0 Issuance value ($) M 40,000 60% Percentage change 200% Percentage change 2015 2016 2017 2018 2019 2020 2015 2016 2017201540,000 20182016 20192017 20202018 2019 2020 Covid-19 pandemic. Green bond 40% Social bond Sustainability bond Sustainability-Linked bond100% 20,000 20,000 Green bond Social bond Sustainability bond Sustainability-LinkedData taken bond from bonddata.org as of 3/12/2020 Green bond Social20% bond SustainabilityGreen bond bond Social bond Sustainability-Linked Sustainability bond bond0% Sustainability-Linked bond 0 0% 0 -100% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Annual issuance ($M) Percentage change Annual issuance ($M) Percentage change

Growth of annual issuance of social bonds Focus on sustainability bonds 120,000 180% 140,000 800% 180% 800% 120,000 180% 140,000 120,000 800% 120,000 140,000 180% 140,000 800% 160% 700% 100,000 160% 120,000 700% 160% 160,000 700% 120,000 160% 700% 100,000 120,000 100,000 100,000 140% 120,000 600% 140% 140,000 600% 140% 100,000 140% 600% 600% 80,000 120% 100,000 500% 100,000 120,000 120% 100,000 500% 80,000 120% 80,000 500% 80,000 120% 500% 100,000 100% 80,000 400% 80,000 60,000 100% 80,000 80,000 400% 100% 80,000 400% 100% 400% 60,000 60,000 60,000 80% 60,000 300% 80% 60,000 300% 80% 60,000 80% 300% 300% Issuance value ($M) 60,000 Issuance value ($M) Issuance value ($) M 60,000 40,000 60% Percentage change 200% Percentage change

Issuance value ($M) 40,000 Issuance value ($) M Percentage change Percentage change

Issuance value ($M) Issuance value ($) M 40,000 Issuance value ($M) 60% 40,000 Issuance value ($) M 200% 40,000 60% Percentage change 200% Percentage change 40,000 60% Percentage change 200% Percentage change 40,000 40,000 20,000 40% 40,000 100% 40% 100% 40% 20,000 100% 20,000 40% 100% 20,000 20,0000 20,000 20% 0% 20,000 Agency Corporate Financial Institution Municipal Sovereign Supranational 20,000 20,000 20% 0% 20% 20% 0% 0% 0 Green bond Social bond Sustainability bond Sustainability-Linked bond 0% 0 -100% 0 0% 0 0 -100%2015 2016 20170 2018 2019 2020 0% 0 0%2015 2016 20170 2018 2019 2020 -100% -100% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Annual issuance ($M) 2015 Percentage2016 change 2017 2018 2019 2020 Annual issuance ($M)2015 Percentage2016 change2017 2018 2019 2020 Annual issuance ($M) Percentage change Annual issuance ($M) Percentage change Annual issuance ($M) PercentageAnnual change issuance ($M) Percentage change Annual issuance ($M) PercentageAnnual change issuance ($M) Percentage change

Looking at how issuance of social and sustainability bonds has grown over the past five years, we can see steady growth until 2020, after which issuance has soared. Based on figures taken from bonddata.org as of 3/12/2020

2020 YTD Breakdown of bonds issued 160,000 160,000 160,000 160,000 by issuer type* 140,000 140,000 140,000 140,000 The increase in social and sustainability 120,000 120,000 120,000 120,000 bonds this year has largely been driven by 100,000 100,000 supranationals and agencies, while social 100,000 100,000 and sustainability bonds also account for 80,000 80,000 80,000 80,000 around half of all municipal issuances as of 60,000 60,000 3 December 2020. This reflects how large Issuance value ($M) 60,000 60,000 Issuance value ($M) Issuance value ($M) governmental organisations have responded 40,000 Issuance value ($M) 40,000 40,000 40,000 to the Covid-19 pandemic with massive 20,000 20,000 increases in social project funding, often 20,000 20,000 with sustainability in mind. 0 0 0 Agency Corporate0 Financial Institution Municipal Sovereign Supranational Agency Corporate Financial Institution Municipal Sovereign*2020 Supranationalup until 3 December 2020 Agency Corporate FinancialAgency Institution MunicipalCorporate FinancialSovereign InstitutionSupranationalMunicipal Sovereign Supranational Green bond Social bond Sustainability bond Sustainability-Linked bond Data taken from bonddata.org as of 3/12/2020 Green bond Social bond Sustainability bond Sustainability-Linked bond Green bond Social bond SustainabilityGreen bond bond Social bond Sustainability-Linked Sustainability bond bond Sustainability-Linked bond

Compiled by Ashton Rowntree 48 Environmental Finance |Winter 2020 Our mission: providing coronavirus aid to North Rhine-Westphalia

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The stripes in the graph show the average annual temperature increase in Germany from 1881 to 2018. Sustainable investments help to achieve the UN‘s SDGs. #showyourstripes @nrwbank

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