High Yield & ESG: pushing green down the credit spectrum

11 March 2020

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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5 minute read

Until recently, sustainability debt, in all its forms, has been the privilege of the investment grade markets. Not any longer. The past year has seen the emergence of ESG-conscious high yield funds and indices, and as a consequence, green high yield issuances.

What is driving the green agenda down the credit spectrum?

Maturing sustainable finance market benefits high yield firms

The maturing of the sustainable finance asset class has paved the way for issuances outside of the first mover sectors, such as utilities and real estate, which tend to be investment-grade rated.

In this now more established market, we’re welcoming issuances from companies in the consumer goods sector or industrials. These firms can finance the environmental and social-driven expenditure specific to their sector – not just the bricks and mortar capex on which the market was built. 

Investors pushing for impact

A growing number of sustainable investors are cognisant of their impact on the real economy. Just buying investment grade debt – from firms with arguably already strong market access – is insufficient for a number of them. Therefore, they’re directing cash into the more volatile high yield market where they can get more leverage over company behaviour. And potentially, noting the increasing evidence linking ESG results to financial outperformance, achieve excess returns.

Data revolution lowers hurdles for smaller issuers

Retrieving the required data about environmental projects and their carbon impact usually is a major obstacle for any issuer looking to define a green framework.  New standardised impact metrics and methodologies (at least in the carbon space) as well as big data and artificial intelligence-driven solutions are starting to simplify this complex task. In due course, this should also help high yield firms, which generally have smaller treasury teams and less in-house ESG data available.

High yield issuers can opt for simpler financing instruments

The more recent generation of ESG financial instruments will likely also prove more attractive to high yield firms. Key performance indicator pricing-linked instruments, for example, require less structuring effort than a traditional green bond, and transition finance should allow for relatively more polluting sectors to finance a broader mix of projects.

Challenges, however, remain to the concept of “responsible junk”: few high yield firms have authoritative ESG ratings, and it can be costly focusing on immaterial ESG factors. Litigation risks of “greenwashing” could also be more pertinent given the more default prone nature of these instruments. Yet various market initiatives are starting to address these roadblocks.

Soon there will be no “glass floor” in being sustainable!

With thanks to Dario Berruti, Nicholas Koch, Niceasia Mc Perry, Jenny Murray, Rabia Sheikh, Jaspreet Singh & Joanna Vijaykumar for their support with the background research for this article.

ESG/Sustainability


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