Sustainable finance is of rapidly-growing importance as increasing regulatory pressures and demand from investors promote the incorporation of environmental, social and governance (ESG) factors in investment strategies.
ESG and sustainable finance – issues in debt finance and derivatives
A key focus for lenders is developing investment decision-making which incorporates sustainability and ESG factors. In the derivatives and structured finance space, particular importance should be given to:
- Building knowledge and understanding of sustainability, ESG and legal requirements
- Developing credit portfolios that incorporate sustainability and ESG criteria and/or relate to credit issued by corporates and institutions with robust sustainability and ESG credentials
- Complying with ESG-related disclosure requirements, which will continue to increase in the future
- Reviewing existing investment governance and adviser arrangements from a sustainability perspective and ensuring regulated firms integrate sustainability and ESG factors in their business, risk and investment decisions
- Assessing sourcing policies, including reviewing whether underlying deliverable commodities meet particular social or environmental standards
- Reviewing contracts with sustainability characteristics, ensuring those characteristics are transparent and verifiable
The European Commission has adopted a number of legislative proposals to promote sustainable finance, including ESG-related disclosure requirements for certain firms, and current consultations address requirements on investment firms to take client ESG preferences into account when giving advice. There are also growing calls for the establishment of a centralised database and standardisation of ESG data in the EU.
Though obviously directed towards lending rather than investing, the law and regulation currently applicable to lenders is similar to that which applies to asset managers, with the focus being on encouraging disclosure and transparency.
While the majority of EU regulations are now part of UK retained law, firms should bear in mind the possibility of UK divergence from these regulations in the future.
Here are some useful links to relevant sources:
Lenders, issuers of corporate bonds and other market participants who fail to keep pace with the change in attitude towards sustainability and ESG issues may find that their offerings become increasingly less attractive to customers.
On the other hand, those who take early steps to incorporate sustainability and ESG factors into their decision-making may find themselves at a competitive advantage going forwards.
The Travers Smith Derivatives and Structured Products practice provides legal support to financial institutions, asset managers, corporates, fintechs, funds and pension scheme trustees on all aspects of their derivatives and bespoke structured financing arrangements.
We are members of several industry associations that are active in the sustainable finance space, including the International Capital Market Association (ICMA), the International Swaps & Derivatives Association (ISDA), the Futures Industry Association (FIA), the Financial Markets Law Committee (FMLC) and the Loan Market Association (LMA).
We are also among the law firms appointed to the inaugural panel of the Impact Investing Institute and provide pro bono support to the organisation, which works to encourage sustainable investment to achieve the UN’s Sustainable Development Goals.
Examples of our work in this area include
- advising a construction materials group on the European Union Emissions Trading System (EU ETS), including the negotiation of forward purchase contracts and ISDA Master Agreements with their counterparty banks
- advising a multinational gas company on a sustainable solution to their gas trading arrangements, including a swap transaction in respect of their existing fossil gas for bio-methane, and assisting with claiming Renewable Transport Fuel Certificates (RTFC) under the Renewable Transport Fuel Obligation scheme for use as consideration for the swap transaction
- assisting a start-up renewable energy provider with its incorporation in the UK and latterly continental Europe, its renewable gas and electricity trading arrangements and an associated comprehensive financing package
- advising an infrastructure fund on arrangements in respect of a surplus of EU ETS Allowance, including the review and negotiation of a carbon credit warehouse agreement