In this month’s ESG market alert, we cover:

• The FCA publishes the final rules on climate related disclosures for standard listed companies and regulated firms;

• The market for ESG securities and securitisation when compared to other ESG debt instruments; and

• What’s new in market practice – Companies are beginning to be required to provide ESG credentials when seeking financing arrangements from certain banks and lenders.

FCA publishes final rules on climate-related disclosures for standard listed companies and certain regulated firms

On 17 December 2021, the FCA published its final rules on climate-related financial disclosures for standard listed companies and certain regulated firms. Key points to note are:

• Policy Statement 21.23 confirms the new rules from the FCA extend the scope of the existing obligation in LR 9.8.6 R (8) for premium listed companies to also apply to standard listed issuers of:

  • equity shares;

  • global depositary receipts; and

  • shares other than equity shares.

• The continuing obligation requires in-scope standard listed companies to include a statement in their annual reports for accounting periods beginning on or after 1 January 2022 adopting:

  • a comply or explain approach when including disclosures in their annual financial report in accordance with the TCFD Recommendations; and

  • providing an explanation of where in the annual report (or other relevant document) the various disclosures can be found (if applicable).

• Policy Statement 21.24 confirms the final rules on climate-related disclosure requirements will also apply to asset managers, life insurers and pension providers.

The full FCA publication can be viewed here.

Talking about a revolution – Making ESG securitisations mainstream

• We have recently published an article on the merits of securitisation to drive forward the ESG agenda and the ways in which this is currently lagging behind other ESG debt instruments. Figures show that the ESG securities market is lagging in terms of deal volume compared to other ESG debt instruments. The AFME found that 2021 was only the second time that European ESG securitisation issuance had passed the €1 billion barrier compared to the US$700 billion in ESG bond issuance in 2020. In our view there are two main constraints holding back ESG securitisations:

  • Uncertainty as to what constitutes an ESG securitisation: Unlike conventional debt and loans, there is considerable uncertainty as to what qualifies as an ESG securitisation. This lack of clarity as to what is a green or social investment makes it harder for issuers and investors to create a marketable product. Various forms of ESG securitisations have come to market in recent years.

  • A lack of eligible assets: The lack of eligible assets for ESG securitisation is not just an issue of scale but also reflects lack of clarity as to criteria that accurately determine what is meaningful when looking at ESG assets today. The market is struggling to get to grips with the complexities between entities in different industries and could benefit from an agreed framework for data and reporting to overcome some of these hurdles.

The near future for ESG securities and securitisation

• In our view, a broader acceptance of “use of proceeds” securitisations is crucial to jumpstart the market and finance the ramp-up required to originate more ESG assets. Such funding sources are becoming more readily available to larger corporations for ESG purposes where they have a steady, demonstrable cashflow (e.g. replacing a rental car fleet with hybrid or Electric vehicles).
• ESG debt instruments alone may not be sufficient to move the dial towards a financial system which more fully aligns to conformed ESG criteria and excluding “use of proceeds” securitisations risks limiting the potential scope of ESG deals in the future.

Read the full article on ESG securities and securitisation here.

What’s new in market practice?

Debt investors and lenders are increasingly requiring companies to provide their ESG credentials in financing arrangements, regardless of whether a company is seeking financing for ESG-specific purposes. This is due to sophisticated lenders having their own internal ESG requirements and due diligence queries which they need to satisfy for new financing arrangements.

The lack of consistency between different lenders’ ESG criteria and expectations presents a challenge for companies seeking finance in the short term due to the different benchmarks such companies would need to adhere to. Over time we expect to see further developments in industry-led initiatives to standardise ESG credentials and disclosure requirements, together with the introduction of regulation to alleviate lenders’ concerns over ESG-washing. We will continue to report on such developments as they progress.

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