ESG market dynamics: Many steps to transition

22 November 2019

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

Other insights

View more insights

Many market participants want to move to the concept of "green issuers", firms that are recognised as having sustainability at the core of their DNA. Yet how do you get there? More robust ESG ratings (in bond final terms?), issuer-wide ESG analysis by investors or... a new generation of sustainability financial instruments?

Enel is helping push the latter. Its recent foray in the $ and € capital markets includes a "25bps sustainability coupon step-up", triggered if it fails to meet a predefined target - related to renewable energy connections and carbon intensity of their operations.

We've seen this technology in the Revolving Credit Facility (RCF) market – e.g. NWM has led over 20 sustainability performance RCF's in the past year and a half. Yet its novelty amongst drawn debt raised interesting questions.

Market participants on the potential advantages vis-a-vis a traditional green bond:

  • Can take into account a company-wide, holistic measurement (rather than just focus on [10]% of projects)
  • It's significantly less labour-intensive to draft - no framework required, simply several paragraphs in the prospectus
  • There is a clear debt pricing impact of pursuing a sustainability pricing impact
  • More accessible to firms without tangible assets / cash outflows with an obvious environmental / social benefit


Of course it is by no means the "holy grail". Concerns that have been raised:

  • How credible / ambitious is the measurement if calculated / proposed by the issuer themselves?
  • It offers the market only one KPI, rather than the 5+ you tend to get on a typical green / social bond
  • The issuer is not restricted from linking the funding raised to projects with a specific environmental benefit - so money could "go anywhere"
  • Not the same degree of governance / external verification that a green / social framework entails

Some of these areas could be resolved by diligent structuring. Below initial thoughts on the structural parameters to take into account when developing / investing in a sustainability performance instruments.

ESG/Sustainability


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved