Broadening financing choices through all-season frameworks

23 March 2020

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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2 minute read

With the sustainable finance asset class growing and diversifying, we’ve seen much broader, all-encompassing borrower frameworks developing.

The reason behind this trend? 

If your Euro Medium Term Note programme allows for a “takeaway menu” of options, why should your Sustainable Finance Framework be restricted to capital expenditure (CapEx) green public bonds?

Looking more closely at this new generation of all-season frameworks, their focus lies on one or more of the following areas:

Single issuers morph into a family of issuers 

Rather than just identifying a single issuing entity, companies are now explicitly referencing all possible borrowers in their corporate hierarchy, including Special Purpose Vehicles - separate legal entities created by a company - and funds that they manage (but may not fully own). Examples of corporates showing such “family flexibility” include National Grid and Prologis.

Diversity of liabilities succeed the monoculture of green bonds

While the ICMA (International Capital Markets Association) principles for the green and social debt markets still reference “bonds” only, a growing number of firms have introduced “Financing Frameworks”. These often explicitly allow for the issuance of a variety of liabilities, be that bonds, loans, commercial paper or hybrid.

And we’re moving one step further: At NatWest Markets, we’re also advising companies on frameworks that seek to combine both, use of proceeds and pricing as well as performance linked instruments (such as revolving credit facilities). These broader frameworks allow issuers to demonstrate a consistent strategy and narrative across both.

A variety of labels and formats showcases the breadth of ESG issuances

As we’ve discussed in earlier articles, over the past year we’ve seen new sustainability-related instrument labels emerging such as ‘transition’, ‘blue social’, or ‘circular economy’ – to name but a few. 

Equally, corporates are considering the most appropriate labels for their project and asset base and launch issuances in more than one format – taking their lead from supranational organisations, who’ve been doing this for several years. An example is Telefonica, whose framework allows for both, green and social debt issuance.

Companies broaden range of expenditures to better reflect delivery of their sustainability initiatives

CapEx spending alone often doesn’t truly reflect the sustainability initiatives of a firm. Hence a growing number of companies are incorporating a range of expenditures such as operating expenses, research and development, and acquisitions – examples amongst others are ENGIE, Starbucks, Co-op and Philips. 

The EU green bond standard has helped increasing the acceptance of these categories – albeit they will remain subject to heavier investor scrutiny.

Overall, during these days of heightened volatility and uncertainty, producing an All-season Sustainable Finance Framework really adds value. Considering these aspects also helps broaden the horizon of issuers. The proverbial hammer-wielders only see nails, while those with a full toolkit can identify the full gambit of ESG opportunities!

ESG/Sustainability
Green bonds
Sustainable finance
Frameworks


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