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Corporate Bonds

Companies feel the green pressure in bond markets as COP26 begins

Glasgow

Bankers and investors say the UK climate conference could have profound effect on corporate finance

Europe’s corporate bond bankers think that the COP26 UN climate change conference being held in the UK this week could have a “seismic” impact on the way borrowers and approach the debt market, with investors looking to pile on the pressure to make companies greener.

Top ranking government officials from around the world, business leaders and prominent campaigners will meet in Glasgow this week in an attempt to divert the brewing climate change disaster.

Finance has long had its part in ushering business towards greener practices — a record $500bn in green bonds are expected to be printed this year, according to the Climate Bonds Initiative. Moody’s reckons ESG issuance as a whole could reach a combined $1tr this year.

But COP26 has the potential to turn environmental, social and governance finance from an add-on in corporate capital structures to the main focus for chief finance officers.

“It could be seismic,” said a syndicate banker in London. “There has already been a couple of companies switching to ESG-only deals, and it wouldn’t surprise me if we see more and more of these announcements before the end of the year.”

A second syndicate banker echoed this sentiment, and added that “anyone who says they’re not watching it closely is lying. It could shape a lot of our market.”

Italian electricity and gas company Enel, which pioneered the sustainability-linked bond structure, has committed to only printed sustainability-linked debt. French oil major Total has made the same commitment.

“There’s a sense that if you’re working to a KPI anyway, why not go all the way and link everything to KPIs,” said the first syndicate banker.

Issuers are increasingly using green or sustainability structures for their first foray into the public debt markets. Proponents of the approach say it gives the borrowers an advantage over entering the markets in a conventional way because it indicates to investors that the company has long term and plans.


On Monday afternoon, the UK's VIA Outlets, a retail outlet operator, mandated BNP Paribas and ING to arrange its debut bond — a seven year green trade. The borrower, rated BBB+ with Fitch, has a second party opinion on its green finance framework from ISS ESG.

Nonetheless, others are more measured in their expectations of COP26. “At the margin it will be helpful,” said a sustainability banker. “The more ambitious the political will, the more it will start to change the dynamic of companies, particularly those sending CEOs and CFOs to the forum. It is not unusual for the board to put on a lot of pressure internally.”

Still tiny market

Despite the plethora of green bonds, it still pales in comparison to the overall debt markets — last year, ICMA put the size of the global market at $128.3tr-equivalent. This means that even in a record year of green bond issuance, the structure only makes up 0.39% of all issuance.

“More and more needs to be done,” said Chris Iggo, chief investment officer, core investments at AXA Asset Managers. “Investors have a central role to play in mobilising finance to support companies and governments that are contributing to a net zero future.”

US indices company MSCI reckons that only 10% of listed companies worldwide have plans in line with a 1.5 degree temperature rise, the upper limit before exponential changes in the global climate, and only 43% of listed companies have plans in line with a two degree rise.

“Glasgow should accelerate the pressures that investors, as owners and creditors, bring to bear on companies to get more of them to pledge to make their business models consistent with a 1.5 degree world,” said Iggo. “We need to stop financing the worst polluters.”

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