16 Mar Frankfurt Notes – Sustainable Finance: And it’s only the beginning…

Sustainable financing is experiencing a boom – and yet it is only at the beginning of its dynamic growth. This is evidenced by the strong increase in investor demand, attractive financing conditions for issuers and the high financial needs to sustainably transform the economy. The dramatic images from Ukraine and the security policy need to become independent of fossil energy sources more quickly will further accelerate this growth. Our five observations and conclusions on where the market stands and what developments we are spotting:

Exponential growth. The outstanding volume of sustainable bond and loan financing was already USD 4 trillion at the end of 2021. Green bonds accounted for 45%, or just under half of this. New sustainable financing rose by a factor of 2.2x year-on-year to around USD 1,650 billion in 2021.  Here, too, the share of green bonds was the highest, at a good third. However, the strongest contribution to growth was made by other instruments, especially so-called “sustainability-linked” financing. These are characterised by the fact that their conditions, usually the coupon, are based on predefined sustainability goals. The use of funds, on the other hand, is free – the essential difference to green or social bonds, whose use of funds is clearly defined in advance.

More London, Frankfurt and Paris than Brussels. With its Sustainable Finance Strategy, the EU Commission aims to make the EU climate-neutral by 2050. As early as 2030, CO₂ emissions are to be at least 55% below 1990 levels. High standards for sustainable financing are to contribute to this. In last year’s survey of 739 German financial players by the Forum Nachhaltige Geldanlagen (Forum for Sustainable Investments), another growth driver nevertheless ranked first: investor demand, namely from institutional investors.

From the niche into the mainstream. Investor demand is driving sustainable finance because the topic has long since left its niche. Blackrock CEO Larry Fink, for example, wrote unequivocally in his CEO letter this year: “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.” Where there is a threat of complete loss of value of assets that can no longer be used, sustainable investment becomes a fiduciary obligation.  Philanthropy and the new term “impact investing” remain relevant investment motives. However, the circle of investors now goes far beyond this.

Funding advantages and capital pots. “Greemium” refers to lower funding costs of sustainable versus traditional financing instruments. The keywords that justify the phenomenon: Value preservation and lower transformation risks, high investor demand and also high initial returns of sustainable projects. According to a study by the Climate Bonds Initiative for the first half of 2021, 29 out of 36 green bonds examined managed without a new issue premium or could even be issued with a yield below the reference curve of the respective issuer. Will financing remain cheaper if issuance volumes of sustainability bonds continue to increase significantly in the future? Uncertain. Will sustainability financing allow access to capital pots in the future that will otherwise be inaccessible? Certainly.

Embedding in ESG strategy. The credibility of sustainable financing depends on the link with the issuer’s holistic ESG strategy – and, in our view, also determines its successful positioning in the long term. The EU Green Bond Standard, something like the new premium standard for green bonds, goes the way of linking with the EU taxonomy. Issue proceeds are to be used entirely for taxonomy-compliant economic activities. However, nothing replaces transparent explanation – via the internet and social media, via specific presentation formats or an investor day. These give space to the vision, ambition and seriousness with which the management team approaches the issue. Occasionally, ESG is still on the sidelines in many presentations. Where successful business development, access to key capital pots and hard funding advantages are concerned, we believe the topic belongs in the middle of corporate strategy and capital market considerations, visible to anyone outside the company.

Would you like to know more about the topic? You might be interested in our webinar “Sustainability in refinancing” (in German) on 14 June and 29 September 2022 at VÖB-Service Academy Webinar: Nachhaltigkeit in der Refinanzierung – VÖB-Service GmbH (voeb-service.de)  – or simply feel free to contact us.