Environmental, Social and Governance Developments

The global trend towards environmental, social and governance (“ESG”) related investments has steadily increased in recent years and, during the maelstrom of 2020, capital flows into funds incorporating sustainability and ESG-driven strategies hit an all-time high. Institutional investors have become increasingly vocal in respect of their sustainability and ESG priorities, and ESG has become an important topic of shareholder engagement.[1] The market for green bonds, in particular, has expanded and diversified in recent years with increased investor demand, including from asset managers, insurers and pension funds. During the pandemic, sovereign green bond issuances continued with a number of tap issuances and a few debut issuances including by Germany and Sweden.

Global regulatory reform in this area also strengthened further in 2020 with the announcement of the EU’s “Green Deal” which makes new funds available, proposes new legislation and seeks to prioritize climate goals in EU policy-making.[2] The European Central Bank also declared that bonds with coupon structures linked to certain sustainability performance targets will become eligible (from January 1, 2021) as collateral for Eurosystem purposes, provided they comply with the eligibility criteria. Although less prevalent than green bonds, social bonds gained momentum during COVID-19 as social issues came to the fore during the crisis, sparking investor demand. Several large issuances of social bonds came to market, issued by supranational issuers (such as the International Finance Corporation and the African Development Bank), corporates and banks (such as Bank of America and Caixabank) alike. Recognising market appetite, ICMA published updated voluntary guidelines for issuances of social bonds (the ‘Social Bond Principles’), to improve standardisation and encourage issuers to adhere to principles for reporting and transparency through the life of the bond.[3] There has also been an uptick in sustainability- linked credit facilities, which allocate loan proceeds to eligible green projects or sustainability targets.

Detailed plans in respect of the UK government’s commitment to match the “ambition of the objectives of the EU’s Sustainable Finance Action Plan” under its own Green Finance Strategy have begun to emerge, including the planned development of a UK green taxonomy. The FCA launched a consultation in March 2020 on its proposal to introduce a new continuing obligation in the Listing Rules that would require commercial companies with a premium listing in the UK to make climate-related disclosures in line with the framework established by the Taskforce on Climate- related Financial Disclosure (the “TCFD”), on a “comply or explain” basis (the same approach as the UK Corporate Governance Code). The FCA also consulted on a technical note that clarifies its expectations in relation to the existing ESG-related disclosure obligations under the Listing Rules and Disclosure.

In November, the FCA confirmed that this new continuing obligation will come into effect for reporting periods from January 1, 2021 onwards. A policy statement and the final rules were published in December 2020. HM Treasury also announced in November its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023. The UK Joint Government-Regulator Taskforce’s Interim Report and accompanying roadmap was published, indicating how it proposes to achieve this aim.

Significant challenges remain in the context of ESG investments and reporting. For financial firms and investors these include, respectively, how to accurately collect, measure and share ESG information on credit exposures and investments and how to fairly compare companies that report under disparate and/ or competing ESG standards.[4] In turn, issuers are faced with the challenge of navigating and complying with a plethora of ESG reporting standards. Efforts to harmonise the various taxonomies and frameworks in the field of sustainable finance gathered pace during 2020, most significantly with the Taxonomy Regulation.[5] Notably, in September, the International Organization of Securities Commission launched a task force to harmonise standards, and the International Business Council of the World Economic Forum (in collaboration with the Big Four accountancy firms) released a set of universal ESG metrics and disclosures to measure stakeholder capitalism.

[1] See our alert memorandum: Increased ESG Focus Shows No Signs of Slowing Down in 2021.

[2] See our alert memorandum: A Sustainable Recovery for Europe: The EU’s Green Deal.

[3] See our alert memorandum: Social Bonds in Response to the COVID-19 Crisis: a Guide for Issuers.

[4] See our alert memorandum: Sustainable Finance: A Global Overview of ESG Regulatory Developments.

[5] See our alert memorandum: A Framework Taxonomy for Sustainable Finance.