Providing clarity to sustainability-linked financing

Second-party opinions are helping corporate issuers to substantiate their sustainability claims, offer confidence to market participants and enhance execution, writes Susan Gray of S&P Global Ratings.

Susan Gray
Susan Gray

Sustainable finance is critical to the successful execution of the energy transition. The speed at which the market is growing has seen issuance multiply year after year – sustainable bond issuance is expected to exceed $1 trillion in 2021 – with the introduction of new products greatly expanding the universe of issuers able to obtain sustainable financing.

Of these, sustainability-linked debt instruments – which include sustainability-linked bonds and sustainability-linked loans – are potentially the most important for companies implementing transition financing across all sectors. However, there is a lack of transparency and consistency when it comes to environmental, social and governance marketing, alongside non-uniform labelling of commitments and reporting. This means it is increasingly challenging for investors to identify which corporates’ sustainability claims are reliable, and which companies are guilty of green or sustainability washing.

Sustainability-linked instruments – and especially those linked to carbon-exposed sectors – are of particular concern. Such instruments enable issuers to use the proceeds for more general corporate purposes and are underpinned by selected sustainability performance targets.

Important steps are underway to improve the quality of disclosure and reporting in the sustainable debt space. A number of voluntary standards, aimed at enhancing market transparency for use of proceeds within the sustainability linked debt market, now exist.

These include the International Capital Market Association’s Sustainability-Linked Bond Principles and the Loan Market Association’s Sustainability-Linked Loan Principles. And although these principles are voluntary, an estimated 97 percent of use of proceeds and 80 percent of sustainability-linked bonds issued globally in 2020 adhered to them, according to the ICMA.

Objective views

Whether, and to what extent, corporates are fully aligned with these principles remains under question. As a result, issuers are increasingly turning to reputable and informed second-party opinion providers to substantiate their sustainability claims, while stakeholders are consulting these assessments before making investment decisions.

At S&P Global Ratings, for instance, we recently launched our SPO service for sustainability-linked financings, which assesses the alignment of entities’ sustainability-linked frameworks or transactions with the five components of the SLBP or SLLP. These include a selection of key performance indicators, calibration of SPTs, instrument characteristics, reporting and post-issuance review.

To inform on the credibility of these projects, for the first time, S&P Global Ratings will give its opinion on the materiality and ambition of the selected KPIs in line with ICMA alignment principles in order to enhance investor understanding and improve execution.

Investor demand for more detailed ESG disclosure will continue to drive improvements in this field. And while there is still some way to go in terms of harmonising the sustainable debt industry, SPOs will address the need for greater transparency and informed assessments for instrument-level ESG disclosure in a growing debt market.

Susan Gray is global head of sustainable finance business and innovation at S&P Global Ratings