$12.8 billion of sovereign green bonds sold by EU issuers in the past two weeks

Over US$12.8 billion of sovereign green bonds have been sold by EU issuers in the past two weeks, displaying a promising surge in the already thriving EU green bond marketsAustria’s issuance of its first green bond on Tuesday, representing US$4.3 billion of sovereign debt, was only the latest report of a green bond selling with a “greenium”—in this case, with a spread of 2.5 basis points over their conventional debt.

ESG and business newsfeeds have been flooded with reports on the so-called “greenium,” the higher price (and therefore lower yield) seen on a green debt instrument as compared to an otherwise identical non-green offering.  We’re seeing surging demand for green bonds, confirming that investors are both willing and eager to pay marginal greeniums for sovereign, municipal, and corporate green-labeled debt. (For some of our takeaways on the what rising issuance means for companies, check out Jacqueline Kessler’s recent post on the growth in global green bonds.)

Growing greeniums, increasing volumes of ESG-labeled securities, and swelling demand for such offerings are all encouraging signs. But beyond influencing this year’s capital raise or investment strategy, what do these trends mean? How do green bonds fit into the larger puzzle that is the net-zero economy? We see three scenarios for how green bonds and green finance might evolve over time. It’s too soon to tell if all or none of these paths will become reality, but we at The Climate Board hope to see aspects of each take shape.

Scenario 1: The greenium persists, spurring higher levels of corporate climate action via new financing. As issuers continue to see high demand for green bonds compared to other debt, the supply of green bonds will continue to grow. The current spread between green and non-green offerings is small—usually ranging from just a few to around 11 basis points—but could grow large enough to incentivize more companies to engage in decarbonization projects.

Scenario 2: Climate risk and climate action criteria will have more influence on credit ratings, bringing larger spreads between more and less “green” securities. Rating agencies like Moody’s and Standard & Poor’s are already beginning to factor ESG criteria into ratings. We have yet to see exactly how much this integration will impact overall creditworthiness and ratings, but when less environmentally responsible firms start to see formerly top-rated securities slide from triple-A downward, issuers will be under greater pressure to respond with climate action.

Scenario 3: Climate and ESG factors don’t have to be integrated into investment decision-making—because they are reflected in core business criteria already. In the most dramatic evolution of the global economy toward prioritization of decarbonization and climate action, green bonds, ESG investing, and climate risk disclosure would lose relevance. Investors, consumers, regulators, and companies would not need distinct ESG data or ratings because companies that do not act to protect their supply chains, fortify their businesses against climate risk, and comply with climate regulations will face increased business disruptions, difficulty attracting top talent, and reduced revenue. Business outcomes will inherently reflect ESG performance.

One theme holds true through all of these scenarios— companies that take definitive action now will be rewarded. Through marginal but increasing greeniums, issuers who take advantage of the vast demand for green offerings will be ahead of the decarbonization curve as the market moves toward fuller ESG consideration. For those who want to lead the pack and reap the rewards, the time to act is now.

For those in search of a partner and resource for any part of the journey, The Climate Board is here. We can support your company on your climate action path. Reach out to us for more information.

SBTi-committed companies make up 35% of global market cap

On Monday the Science Based Target Initiative (SBTi) released its 2021 Progress Report, which contains a number of encouraging findings about the global economy’s progress on emissions reduction.

Here’s what we at The Climate Board took away from the report.

It won’t be long before participating in SBTi is simply an expectation for large companies. Overall participation in SBTi doubled in 2021, with 2,253 companies now either setting approved targets or formally committing to do so, up from 1,039 in 2020. Commitments aren’t languishing unfulfilled, either; the cumulative number of approved targets in 2021 also nearly doubled. The magnitude of SBTi’s growth is even clearer in economic terms: SBTi members now represent 35% of global market capitalization. $38 trillion in market value is now associated with ambitious climate action and emission reductions. This dramatic growth is a great sign for the planet, and for the emissions-conscious business community. As more companies sign on to SBTi, it will become harder for others to remain on the sidelines, and those who do run the risk of falling behind – not just on the declaration of their goals, but on progress towards them.

Companies with approved targets are outperforming important benchmarks. SBTi-approved companies reduced carbon dioxide-equivalent emissions by 29% between 2015 and 2020. They also have reduced their Scope 1 and 2 emissions since setting their targets by an average of 8.8% per year – more than twice the reduction needed to align with a 1.5°C temperature target. These companies are showing that measurable, meaningful, and sustained emissions reduction is possible. It’s also important to note that SBTi companies are outperforming their non-committed peers. Scope 1 and 2 emissions fell globally in 2020 by 5.6%, largely on account of the COVID-19 pandemic, but companies with approved targets pushed further, reducing their own emissions by 12.1%. It’s very encouraging that these companies did not settle for the “natural” emissions reduction associated with economic calamity, but indeed continued to lead and outperform. A powerful example has now been set for the hundreds of new participants in the SBTi.

Supply chain engagement is still an important missing link for driving emissions reduction through the economy. Scope 3 emissions tend to make up a significant share of a company’s emissions profile, with value chain emissions making up between 65 and 90% of a company’s overall carbon footprint. The small and medium sized-enterprises (SMEs) that make up much of larger companies’ value chains are beginning to play a more significant role in SBTi, as 177 SMEs set targets in 2021, up from only 29 in 2020. But many smaller companies will need support from larger partners to tackle decarbonization. It’s concerning that only 16% of companies have set engagement targets for their supply chains.

Complete and consistent emissions reporting is sorely lacking. SBTi found that in 2021, 28% of member companies had no public information regarding the progress made against their targets. That’s actually more than the 13% of companies not providing information in 2020. Perhaps some leeway can be given to the many new SBTi participants who have yet to build up reporting and disclosure capabilities, but the grace period must be short, especially as mandatory reporting looms in the United States and regulations strengthen worldwide. Transparency is essential to demonstrate progress, shine a light on best practices, and justify further investments.

On balance, we believe SBTi’s findings are news to celebrate, amplify, and reflect on. Corporate climate action is making an impact, and there’s plenty of reason to believe that progress will continue. But it’s always worth remembering that trends and statistics are made of real companies, led by real people, doing real things. Nothing is automatic or inevitable, and those hoping to lead the transition must continue to actively break down barriers to further action.

The Climate Board works with businesses to navigate climate issues and drive rapid progress. No matter where your company is in its climate action journey, we can help. Reach out to our team at info@theclimateboard.com for more information.

Green bond issuance grows over 200x in the last decade

The green bond market is expanding rapidly. Global green bond issuance has grown over 200-fold in the last decade, from $2.3 billion in 2012 to $511.5 billion in 2021. In that period, these bonds accounted for over 93% of total green finance globally.

Green bonds exclusively fund projects with positive environmental impacts. The first green bond was issued in 2007 by the European Investment Bank, which used proceeds for renewable energy and energy efficiency projects. What began as a slow-growing market has been expanding exponentially in recent years – and nearly doubling from 2020 to 2021 alone. The rapid growth of green bond issuance underscores the ever-increasing pressure to achieve climate goals and realize a net-zero economy.

Beyond environmental stewardship, companies may benefit financially and reputationally in a number of ways from issuing green bonds:

  • “The greenium”: This concept refers to the premium of a green bond. Borrowers of green bonds are able to pay lower interest rates than those of conventional bonds. While the spread between green and traditional bonds is small – up to 11 basis points – it is significant enough for CFOs to keep an eye on as they consider their financial strategies.

  • Investor base diversification: Issuers of green bonds attract new investors. Companies issuing these types of bonds have seen an increase in the share of long-term and green investors by 21% and 75%, respectively.

  • Stock price increase: Studies have found a positive stock price reaction around the announcements of green bond issuance. The stock price increase is particularly strong for issuers with green bonds that have been certified by independent third parties.

  • Higher return on investment: Companies issuing green bonds benefit from higher financial performance. Borrowers see an improvement in the return on assets (ROA) – a measure of profitability – by nearly six percent in the long run.

  • Enhanced environmental performance: Green bond issuers show improved environmental outcomes. They tend to have lower emissions, more green innovations, and better environmental scores, all enhancing company reputation.

Nevertheless, the rapid growth of the green bond market and its numerous benefits to issuers has introduced problems for regulators and investors. Concerns rise over greenwashing: in this case, a phenomenon in which green bond issuers make exaggerated environmental claims in order to secure funding from investors. A lack of standardization around what constitutes a green bond has contributed to a lack of credibility and consistency. Furthermore, despite the acceleration of this market, green bond growth is still insufficient. In order to achieve a net zero economy by 2050, green bond issuance must reach $5 trillion annually by 2025.

Despite these concerns, the green bond market has a promising future. New standards aim to tackle issues of greenwashing; for instance, proposals for the EU Green Bond Standard (EU GBS) would increase transparency of the green bond market. Additionally, S&P Global Ratings estimates that annual sustainable bonds (including green bonds) will surpass $1.5 trillion before 2023.

Although green bonds make up a small portion (1.7% from 2012–2021) of the total bond market, issuance continues to rise exponentially. The green bond market is a new yet promising space. Companies are increasingly recognizing the environmental, financial, and reputational benefits of green bond market participation. Financial leaders should pay particular attention to this developing market and take advantage of the opportunities that lie ahead. Green bonds are a key ingredient to meeting global sustainability goals and will only become more significant to the overall bond market.

Climate action demands skilled financial leadership in a rapidly evolving marketplace. If you’d like to learn more about how we’re helping CFOs and other financial leaders navigate the transition to a low-carbon economy, or if you’d like to participate in our research, contact us at info@theclimateboard.com.

87% of investors consider ESG when making investment decisions

On March 23, global investment manager Nuveen released the results of its second annual EQuilibrium survey, uncovering the drivers of investor behavior. The 2022 study, which polled 800 global investors and consultants, reveals that climate change and its market consequences are already compelling asset owners to reexamine their traditional investment approaches.

Among the key findings: a vast majority of asset owners (87%) currently weigh environment, social, and governance (ESG) factors into their investment decisions or plan to do so within the next year. Within ESG, climate change and its effects are especially important in investors’ eyes:

  • 71% of institutional investors believe that climate risk is investment risk.

  • 79% believe the transition to a low carbon economy is inevitable, and even more (86%) believe the transition presents opportunities.

  • Climate risk was the second most cited trend shaping institutional portfolios over the next five years; only technological change ranked higher (by 1% of respondents).

  • 90% of insurance companies—a sector particularly adept at the identification and quantification of risk—address climate risk in their portfolios today or plan to do so within two years.

Put simply, investors understand that ESG risks, and climate risks in particular, are real and material. They also understand that companies that take action to address those risks are better investments. According to the OECD, companies with strong ESG practices may see enhanced revenue, corporate reputation, competitive positioning, and supply chain reliability, among other benefits. A majority of ESG investors believe that those investments are actually “safe havens” that retain value or even appreciate during downturns.

As investor attention grows, the pressure on companies to, at the very least, disclose, and ideally to improve ESG performance mounts as well. Importantly, investor pressure is additive to existing motivations. Companies must recognize that the benefits of meaningful climate action are growing, and they should recalibrate their strategies in light of investor priorities.

The Climate Board understands that climate action is sound strategy, but one that requires skilled financial leadership. If you’d like to learn more about how we’re helping CFOs and other financial leaders navigate the transition to a low-carbon economy, or if you’d like to participate in our research, contact us at info@theclimateboard.com.

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