The massive level of interaction between investors, issuers and borrowers experienced in 2021 is expected to push sustainable finance, particularly green and sustainability-linked bonds (SLBs), into the mainstream of financial markets in 2022.

This is evidenced by the global sustainable issuances having almost doubled to US$902 billion year-to-date November 22 2021, with the volume of SBLs alone skyrocketing to US$105 billion in 2021 from only US$13 billion in 2020, according to market data from Natixis Green & Sustainable Hub.

The sharp increase in volume of sustainable finance within a relatively short period has been attributed to the heightened level of awareness on the seriousness of the climate-change problem among investors and issuers alike during the last 12 months.

“The sustainability-linked feature of financing is quite new,” says Olivier Menard, head of the Green & Sustainable Hub, Asia-Pacific, Natixis Corporate and Investment Banking, in an interview with The Asset. “It was created only 18 to 24 months ago, but it has been booming because of regulatory, corporate image and communications reasons, and investors eager to see an ESG [environmental, social and governance] dimension in the products they are buying.”

In addition, to recruit and retain talent, corporates are under pressure to show publicly that they have engaged in sustainability.

At present there are two families of products under sustainable finance. First, there are green and social bonds, which are basically intended for the finance-specific renewable projects of the issuing corporates.

Second, there are the sustainability-linked or “transition” products, which are not dedicated to a specific renewable project, but are used for general corporate purposes oriented towards the de-carbonization of their finances. De-carbonization is the process of reducing a corporate’s greenhouse gas (GHG) emissions to net zero by 2050, in accordance with the precepts of the 2015 Paris climate agreement.

“Sustainable finance initially was all about ‘green’, but we all know today that you don’t need to have green assets to decarbonized your company,” Menard adds. “There are a number of high GHG-emitting companies that are developing a lot of initiatives to decarbonize their initial process. And, until recently, there were no tools available within the finance world to accompany those core points.”

“The sustainability-linked loan is a transition tool,” Menard notes, adding that what he does at the Natixis Green & Sustainable Hub is help corporates design sustainability-linked loans by identifying key performance indicators (KPIs) and then creating a loan structure tailored to their requirements, that is, the sustainability material topics that the company has to address. “Once you have those KPIs in place, we design the right targets for each of those KPIs.”

Once the targets for KPIs are achieved, usually measured on a yearly basis, the sustainability-linked loan is presented to financing banks, for example, in the form of a syndicated loan. In the event that the corporate fails to achieve the targets for the KPIs, they pay a penalty in the form of increased margins on the loan.

“In reality, the companies already have their financings in place, which are conventional transactions,” Menard notes. “But then each company is going through its own energy transition, so it depends on the level of awareness and maturity of these transition strategies.”

And sustainable finance is expected to grow in the years beyond 2022 as countries implement their respective commitments to the net-zero targets they announced in the run-up to, during or in the wake of the 26th United Nations Climate Change Conference (COP26) held in November 2021 in Glasgow.

“We owe it to take action to try to reach the targets of the Paris agreement to be net zero by 2050," Menard shares. “Until two years ago, people didn’t see this as a priority.” But, he points out, COP26 and the Covid-19 crisis have helped push an increasing number of countries – in addition to those in Europe, and that of China and Japan – into adopting green action plans.

Another positive turn of events, he observes, has been the election of Joe Biden as the president of the United States, who upon taking office immediately recommitted the country to the Paris agreement, after his predecessor’s withdrawal.

Today, Menard states, there is a greater alignment of countries working towards the goal of fighting climate changes, and they are producing increasingly stringent regulatory requirements on disclosure. And stock exchanges are doing their bit as well, he notes. "The Hong Kong Exchange, for example, will require listed companies to provide more disclosure on their environmental and social risks by 2025.”