The pandemic has clearly been a game changer in many respects, not least for the outlook of financial markets. But our 10 sustainable finance trends to watch in 2020, launched at the end of 2019, remain unchanged and have in many cases already been realised.
After closing the books for the first half of 2020, we, the Sustainable Finance Advisory team at Nordea, take the opportunity to review and revise the key developments we predicted for 2020 in the sustainable finance and labelled bonds market.
5 predictions in the broader sustainable finance area
1) The European Commission’s Action Plan will continue to roll on: The “green deal” by the new European Commission leadership will strengthen the body’s focus on sustainability.
H1 status check: When the green deal was launched, the European Commission committed to providing an overarching strategy on the subject. In April, the European Commission initiated a consultation for the renewed sustainable finance strategy, which concluded on 15 July.
Looking ahead: The target delivery date for the final renewed sustainable finance strategy is set for Q4. We also expect other developments within sustainable finance from the European Commission, such as clarifications on the EU Taxonomy and the EU Green Bond Standard. The commission maintains it strong focus on sustainability.
2) ESG data and service providers: 2019 saw consolidation in the space of ESG data and service providers as investor demand rises.
H1 status check: Morningstar has acquired the remaining shares of Sustainalytics, and Bloomberg recently announced the launch of its own transparent ESG scores available on its terminals.
Looking ahead: The investor interest and need for ESG data looks set to grow further. The focus ahead will be on transparency, relevancy and comparability, spurred by the increased pressure on investors to disclose ESG data under the Disclosure Regulation, which will be implemented in March 2021.
3) Internal alignment and harmonisation: Harmonisation will continue to be a key focus in 2020, extending into 2021 and beyond.
H1 status check: China updated its catalogue of eligible projects for green bonds and is now excluding “clean coal” from the updated draft published by the country’s central bank in May. This marks a step towards harmonising global standards, and we expect to see further alignment in the future.
Looking ahead: With increased investor focus on clear and comparable investment opportunities where the risk of green washing is minimal, we are awaiting the implications of the EU Green Bond Standard, which looks set to be formalised next year.
4) “Transition” and “target-linked” finance: Transition and target-linked finance was a core theme of 2019 and will only grow in 2020.
H1 status check: The sustainability-linked bond principles were launched in June, and interest in “transition finance” is increasing. Sustainalytics and ISS ESG have both updated their second party opinion methodologies to support issuers of transition bonds.
Looking ahead: With the sustainability-linked bond principles launched, it will be interesting to see how the structure of this format evolves in the coming months and what types of issuers will utilise it. The same goes for the transition bonds, which don’t have their own principles or standards but could become a relevant alternative for transitioning companies. Both formats can be used for committing to a transition, and it will be interesting to see which one gains traction.
5) ESG reporting: It is still early days for ESG reporting, but it will only gain importance in 2020 – and beyond
H1 status check: The Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) have announced joint guidance and user examples from entities reporting under both standards, with the aim of promoting clarity and comparability. This is a welcome initiative, given the large number existing and future reporting recommendations and standards that entities will have to navigate within the non-financial reporting field. The United Nations is set to launch the Sustainable Stock Exchanges in September, and an informal working group has been set up for a Task Force on Nature-related Financial Disclosures (TNFD).
Looking ahead: The Disclosure Regulation, set to take force in March 2021, and the EU Taxonomy regulation, under which investors are to disclose their alignment for financial year 2021, will both mean increased focus on ESG reporting in the near and long term.
Sustainability-linked bonds can be a good supplement to green bonds, helping to open the sustainable bond market up to issuers that struggle to use the established use-of-proceeds format.
5 predictions in the green, social and sustainability bond areas
1) Green Bond Principles vs EU Green Bond Standard: The Green Bond Principles are still the main reference point, but 2020 will see the official launch of the EU Green Bond Standard.
H1 status check: The European Commission’s Technical Expert Group (TEG) released its final report on the EU Green Bond Standard in March.
Looking ahead: The market awaits an update from the European Commission in the second half of 2020, with clarifications on what form the EU Green Bond Standard will take.
2) Corporate supply: Corporates were the main drivers of supply 2019. We expect this to continue in 2020.
H1 status check: The uncertainty on the market during the spring was combined with an increased and urgent funding need for many corporates. However, the increased issuance of corporate bonds did not result in a increased supply under the green format which stood down in favour for the urgent funding need. Currently SSA (Sovereigns, Supranationals and Agencies) issuers are leading the race in the green, social and sustainability bond supply, mostly due to their increased social bond issuance in response to the pandemic.
Looking ahead: Now, when corporates’ urgent funding need is met, we expect the green format to be restored as a focus area for funding teams on the corporate side.
3) Transition and other labelled bonds: 2019 saw an array of different labelled bonds, from “transition” to SDG and Blue.
H1 status check: This year, so-called “Corona” or COVID-19 bonds were added to the list.
Looking ahead: We expect less action in “transition bonds,” but we still consider it important and believe we’ll see additional supply already this year – especially given that some second party opinion providers have prepared and updated their methodology to be able to assess and evaluate transition bonds.
4) “Target-linked” bonds: We expect to see more target-linked bonds in 2020. Governance is an issue to be addressed.
H1 status check: ICMA in June published the sustainability-linked bond principles, giving additional legitimacy to the format.
Looking ahead: We believe that sustainability-linked bonds can be a good supplement to green bonds, helping to open the sustainable bond market up to issuers that struggle to use the established use-of-proceeds format. We expect to see more sustainability-linked bonds in 2020 H2.
5) Green bond reporting: Reporting is a cornerstone of the green bond market and one of the most important areas to follow.
H1 status check: A Nordic Public Sector Issuers: Position Paper on Green Bonds Impact Reporting 2020 was launched. The Green Assets Wallet, an online platform for issuers and investors in green impact, and Nasdaq Sustainable Bond Network, a platform with detailed information on sustainable bonds for investment due diligence, selection and monitoring, are both online tools launched to assemble green bond data.
Looking ahead: If the above mentioned platforms achieve high user rates, their transparent, comparable and relevant data will become invaluable for investors and a discussion point for the sustainable bond market.
For our original predictions, see 5 key trends to watch in the sustainable debt markets.
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