March 26, 2025 • 31 mins
Sustainable-debt issuance reached $1.63 trillion in 2024, and though regulation has been critical to driving the growth of sustainable-finance markets, it risks being a distraction if it’s too onerous. The key will be focusing on the 20% of metrics that drive 80% of the impact on our investment decisions, says Dr. Arthur Krebbers, managing director and head of Corporate Climate and ESG Capital Markets at NatWest. In this episode of ESG Currents, Bloomberg Intelligence director of ESG research Eric Kane and ESG analyst Grace Osborne are joined by Dr. Krebbers to discuss the evolving sustainable-finance landscape. The discussion ranges from the role of labeled debt to environmental alpha and the quest for measurable impact as transition finance comes into focus and new products emerge to shape the future of the industry.
This episode was recorded on Mar. 5.
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Episode Transcript
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Speaker 1 (00:08):
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory attention and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzwords
(00:29):
and lingo, and we aim to break these down with
industry experts. Welcome to ESG Currents, your guide to navigating
the evolving ESG space, one topic at a time, Brought
to you by Bloomberg Intelligence, part of Bloomberg's Research department
with five hundred analysts and strategists working across all major
(00:50):
world markets. I'm Eric Cain, director of ESG Research for
Bloomberg Intelligence.
Speaker 2 (00:56):
And i am Grace Osborne, a mere ESG integration animalist.
Today we're diving into sustainable finance as the market rebounds,
with sustainable debt issuance hitting one point sixty three trillion
dollars in twenty twenty four, and it appears to an
extent to be defined the ESG backlash as sustainable debt
issuance in the Americas had record January volumes. From Greeniam's
(01:18):
to market Integrity we'll explore the fifty trillion dollar transition
investment opportunity, the quest for measurable impact, and emerging products
from biodiversity to water shaping the future of sustainable finance.
Joining us is Dr Arthur Krabers, Managing Director and head
of Corporate Climate and ESG Capital Markets at Netwest. Arthur's
(01:38):
expertise span structuring sustainable debt, creating responsible investment portfolios, and
benchmarking corporate sustainability. Outside of Netwest, he's a visiting professor
at Strathclyde University, where he earned his PhD in finance.
We are really looking forward to getting into this conversation
with you, Arthur. Thank you so much for joining us
and welcome Hiwise.
Speaker 3 (01:57):
Thank you for having.
Speaker 2 (01:57):
Me, and perhaps as a starting point, can you give
us a bit of background around your role and involvement
and sustainable finance.
Speaker 3 (02:05):
Absolutely so. I began my career as a traditional capital
markets banker and around twenty ten, twenty eleven, so my
clients have asked me questions about these things called green bonds,
and I took an interest, and this was still very niche.
It was really a bit more of a hobby for
(02:27):
me at the time. But that started evolving to as
you described, the role I have today, which is to
head our corporate coverage within the climate ESG capital markets function,
and as I describe it is to help corporate treasury
functions become sustainable treasury functions, whereby for really any financing
(02:49):
or treasury decision, they are actively considering ESG components. So,
as you described it, there's a quite mature sustainable debt market.
That's certainly a high profile part of my role, but
it can be also more behind the scenes elements such
as thinking about your banking group, your suppliers, thinking about
(03:12):
the kind of cash management decisions that you're making, and
whether you're skewing sustainability considerations into those as well.
Speaker 1 (03:21):
Wonderful maybe as a starting point. The term sustainable finance
is something that gets thrown around quite a bit. I'm curious, Arthur,
if you could give us kind of a high level
summary of ultimately how you define the sustainable finance asset class.
Speaker 3 (03:38):
Absolutely, I would split that into I guess two segments.
I think the first sort of core definition of sustainable
finance is a financial instrument which is structure to include
a tangible sustainability component, and that could be either linked
(03:59):
to how the money is spent, or it could be
linked to the incentives inherent in the instruments, what we
call sort of KPI linked types. That's kind of my
core definition includes a sustainable finance technology. Now the expanded
definition for me is any financial instrument where the investment decision,
(04:24):
to an important extent depends on sustainability factors. And that
could be for what we quite guess for an offensive
strategy where there's a really positive sustainability story to be told,
or I guess it'll be more defensive where the investor
needs to actively consider possible esg. Controversies or concerns associated
(04:47):
with the issuer of that instrument.
Speaker 1 (04:48):
That's really interesting, and given how you kind of divided
sustainable finance into into two categories or two definitions, how
do you think the space or the landscape has ultimately
evolved over the last several years.
Speaker 3 (05:02):
So what's been an important evolution, particularly within that first,
you know, structured segment of sustainable finance, is that it's
starting to move from what was initially an industry led
you know, voluntary coalitions of the willing driven sets of
standards towards one that's becoming much more regulated where there's
(05:27):
a there's an important role for particularly you know, financial
regulators in defining how you can attach a sustainability label
to an instrument, to to to a fund, to a portfolio,
et cetera, et cetera. So that regulation has been the
main trend since since I joined in this space, and
(05:48):
and and looking ahead, what I think will be really
a critical trend as more stainble finance reporting becomes mandatory
is the expansion of that second class of stainable finance
instruments that incorporate sustainability considerations in an investment case, even
though they may not be formally structured as a green
(06:11):
bond or a stained with your linked instrument. In our mind,
that space is going to expand, and you know that
the classic debate that we're having is, you know, does
sustainability become like investment grade is referred to today, that
where if you don't meet minimum environment or social reporting
and performance standards, you start getting locked out of different
(06:35):
parts of the capital market. So looking ahead that that's
what we're spending a lot of time analyzing and assessing.
Speaker 2 (06:42):
It's interesting you're talking about that second class of sustainable
finance instruments which incorporates sustainability in the investment case but
not formally structured as sustainable products. I guess then, what
DC as the role of label debt markets like the
green bonds going forward? If sustainability is kind of becoming
that investment grade that becomes a minimum to meet certus
(07:05):
environmental and social disclosure, and what have we seen is
the role of like labeled debt in kind of driving
sustainable finance growth so far?
Speaker 3 (07:14):
Well, it's a really good question because a lot of
clients do ask us, okay, if that's your future where
everything's becoming inherently part of the investment and the credit process,
these stability considerations. It's still a role for these more
structured instruments to green bottles, a KPI linked dead instruments,
(07:35):
which are currently maybe you know, two or three percent
of the debt capital markets.
Speaker 2 (07:41):
You know.
Speaker 3 (07:41):
My view is yes, they will continue to be a
role for for these more structured instruments because they cater
to specific types of responsible and sustainable investment strategies. So,
I mean, there's there's hundreds of different same investment strategies,
but if I look, for instance, at some of the
(08:02):
impact strategies where you know, my aim is that for
every dollar that I invest, besides a financial return, I
can I can quantify some sort of environmental alpha, you know,
that type of follow the money emphasis that those kind
of strategies, green bonds, use of proceeds instruments are very
valuable because you know where the money is going. And equally,
(08:26):
if I'm developing a transition strategy and we'll get onto
that later as well, where my focus is on incentivizing
companies to decarbonize, I may well favor issuance that has
a has a KPI embedded in the instrument, whereby there's
a pricing incentive, even small, but still a pricing incentive
(08:48):
for the company to meet some of these pre agreed
decarbonization targets. So I do think even in a world
where you know this this will become more common place
sustainability investment analysis, that there will be a value in
having some of these more structured instruments for those specific
investment strategies and.
Speaker 1 (09:08):
Are there Earlier you mentioned the idea of regulation being
one of the key trends in the space over the
last couple of years. It's my take and I think
you know you would agree that a lot of the
regulation is coming about due to concerns about impact and
integrity of some of these instruments. A lot of that
concern has evolved around you know, sustainability linked bond, sustainability
(09:31):
link loans, for example. Given this extra you know scrutiny,
how ultimately can we maintain kind of the focus on
impact and integrity for sustainability link loans and link bonds.
Speaker 3 (09:45):
Yeah, no, it's it's that's absolutely right. So that the
regulation has emerged because like any you know, quickly evolving
trend in finance, the regulator what wants to ensure that
the kai kind of instruments, the kind of investment strategy
being developed, are of a high standing and certainly you know,
(10:07):
pursue the kind of things that they say they intend
to pursue. And and I think that that should be welcomed.
I think as sustainable finance practitioners, you know, we shouldn't
be blindly opting for growth in this market, where we
should be opting for responsible growth where we're any new
issuance is of a high is of a high standing.
(10:29):
And when it comes to you know, discussions like greenwashing,
maintaining market integrity, I think it's incumbent on on each
of the market participants to provide such checks and balances.
It's incumbent on on the issuer to be very thoughtful
in developing their stable finance strategy, not use it as
(10:49):
a quick to market or quick to a little bit
of extra demand. It's incumbent on the intermediary used to
sort of have a really you know, you know, robust
structuring process. It's in coming on the the investors when
they're doing their analysis that to have have some really
appropriate your questions and scorecards. So it's sort of each
of the chains of that investment and fundraising process. But
(11:12):
but you know, I am a believer that there is
an improvement cycle in this market. If I look at
the first generation of green bonds, sustainability linked bonds that
were structured, they were probably a little bit too vague
to too fanciful. And you know, I'm often asked what's
your what's your favorite sustainable finance framework or instrument, and
(11:34):
I tend to say the most recent one, you know,
because because there is that improvement cycle where companies, where banks,
where investors do learn and consider build on on each
other's approaches to market and and that's certainly what we
seen with with SLBs as well, so KPI link bonds,
where the ambitiousness of the target, where the thoughtfulness around
(11:57):
the penalties, where you know, the material reality of the
metrics being being addressed, you know, has has been improving.
Speaker 1 (12:05):
Interesting. Another area of focus for kind of standardization is
the green bond market. And you know you mentioned green
bonds just a few moments ago. So last December we
saw the EU Green Bond Standard come into play and
I think, as you suggested, you know, that's really intended
to aid transparency around allocation and impact and ultimately to
(12:28):
you know, push borrowers to get more specific around the
actual impact of the bond when issuing these dead instruments.
Here us to hear your thoughts on where you see
you know, uptake of the green EU Green Bond standard going.
Speaker 3 (12:43):
It's it's indeed a really good example of the trend
we're talking about about a degree of regulation and agree
with I guess top top down developments on this market,
and it has got quite some traction already. You know,
by our calculations, some twenty percent of green bond issuers
(13:05):
have made a best efforts commitment in their framework to
align with the EU Green bond standards, and of course
we've seen of the first generation of that in the
in the first in the first quarter. I mean our
senses that this will form a desirable if you'd like,
(13:26):
gold plated part of the green bond market will likely
have slightly separate pricing and demand dynamics, because we're already
starting to see you know, certain regulators prioritize to get
slightly preferential or exceptional treatment to EU green bond, so
that clearly will help in terms of the investor demand.
(13:46):
And then certainly if we get to sort of you know,
also different you know, carbon and financed emission treatments, But
we don't think it's going to dominate the whole of
the green bond market, or indeed the hall of the
European green bond market, because the you know, the work
involved that particularly the time a little bit less the
cost can be prohibitive for more incidental bond issuers, for
(14:12):
slightly smaller firms, for certain sectors that aren't as well
covered by the EU taxonomy at the moment, such as
telecom issuers, or indeed for lots of non European companies.
So so so a helpful gold plated standard within the
green bond market, but it's not going to be the
beyond end all of green bonds.
Speaker 2 (14:34):
Interesting, and I think as you're saying that it could
see kind of increase demand for those that meet the standard.
We've seen kind of different trends with green ms within
the space, and actually different regional trends. I think in
the Middle East they're still seeing sometimes their green bond's
going like five times they've subscribed. What do you think,
(14:56):
what are you seeing in terms of green ems and
do you think that kind of gold standard will continue
to drive maybe a slight increase in demand and price premium.
Speaker 3 (15:07):
It's it's a it's a great point, and I think
it's it's very important for us as as partitioners to
to track things like the greenium, like the diversification benefits
of these instruments, because as I said, there's there's more
work involved, so that the treasurer who's going through those
hoops wants to have that that that information. Our view
(15:31):
is that it's hard to pinpoint a specific number of
basis points across the board. The greenium will develop will
depend on certain characteristics in relation to you know, the
quality of the issuers overall environmental and transition strategy. It
will depend on the quality of the framework the projects
(15:52):
being financed, and it may also be dependent on I guess,
more traditional portfolio management considerations like the rarity value. You know,
if I'm coming from the consumer sector doing a green bond,
that's probably more undersupplied then from the utility sector. And similarly,
you know, interestingly that the dollar market is quite undersupplied
I guess for obvious reasons green bonds, but actually they're
(16:15):
the greedium because of that undersupply is a bit firmer
than in the euro bond market, for instance. So it's
a range, and that's how we have the discussion with
the issue. These are in our mind the factors that
will likely drive it, and yes, in the future that
will likely be a degree of utaxonomy alignment and potentially
also EU Green bond standard alignment as well. And I
(16:37):
guess the final thing I would say is it will
also depend on the overall yield of the offering. If
I'm being bringing a trip away sustainable bond to the
market that's only being cleared at a couple basis point
over the risk free rate there's not a lot I
can negotiate from that versus a double B offering with
a much higher yields. This potentially more and more of
(16:58):
a greenium. And I guess the only final part, which
is harder to quantify, but there is enough academic evidence
for this, is this halo benefit which which can ironically
compress the cream payer. If a company brings sustainable issuance
to market, that can also lead to excess demand on
(17:18):
other parts of a capital structure, both debt and equity.
So that's this other benefit we're discussing with treasurers, you know,
alongside the direct sort of pricing tension for the instrument itself.
Speaker 1 (17:32):
So sitting here in the US, I think one of
the topics that's been dominating the news in the last
couple of months at least has been some of the
big banks exiting the net zero banking Alliance and kind
of deciding to remove their net zero strategies. But within
that we're seeing those same banks kind of maintaining sustainable
(17:54):
finance targets. So I'd say there's kind of an increased
focus then on the sustainable finance targets, and then that raises,
of course the question that we don't have a single
taxonomy or definition for sustainable finance and ultimately what that entails.
So I'm curious to hear your thoughts on, you know,
(18:14):
how investors are ultimately you know, defining transition finance for example,
and how we can work to maintain some of the
you know, integrity in the market to capture that upside.
Speaker 3 (18:27):
Yeah, no, it's it's it's a really valid point in this.
Of course, certain regulation that you'll mandate, such as the
SFDR machine in Europe that will mandate investors to provide
their definition of sustainable investment. And as I was saying earlier,
there's hundreds of different strategies out there, so I think
(18:49):
it's unlikely that you'll get sort of consensus there. That's
investors that focus on the impact, that the investors focus
on holistic risk management, investment that focus on the ethical
side and excluding deemed sort of negative activities. But an
important one, as your question, is increasing becoming transition finance,
(19:12):
because there's this realization in the marketplace that just you know,
putting money into already green, already sort of close to
carbon neutral economic activities is insufficient. We need to start
putting money into quote unquote browner sectors, issuers, geographies and
supporting them in their improvements. That that's what additionality should
(19:35):
be about. And we we you know, quite consistently get
questions from both investors and issuers around how did I
then set up a credible transition plan a credible transition
in investment strategy, and in our mind that will depend
on on a number of factors. Clearly, there's certain issuer
(19:58):
level benchmarks that you can apply. So at the issuer
level you can look at certain scientific transition pathways such
as sign science based Targets initiative and use that within
your definition. So I guess that's the issuer level. But
then for certain investment strategies where you're investing into projects,
you know, to your point, it is helpful to have
(20:19):
a taxonomy of what are uh your transitioning activities, what's
the right type of building, retro fit, more efficient aviation
fuels to to invest in? And again there you know
we have seen certainly in the Asian markets a number
of governments propose dictionaries for that. So it'll be a
(20:40):
combination of setting standards at the issuer level around there
their sort of pathway, their commitments are targets and then
setting standards at the project level, what are what are
based on the current technology? Uh, your credible standards. And
I guess another point, and this is what's quite exciting
about salable finance. It often leads to really open dialogue
(21:00):
between the buy and the cell side. So well, we
may agree on today, is in today's definition today's acceptable
standards that should and will evolve and that should require
collaboration between the buy and the cell side because there's
unfortunately still very often big deltas between what investors would
(21:21):
like to see in terms of transition behavior, what's feasible
for most issues.
Speaker 2 (21:26):
Yeah, I think it's so interesting that it feels like
at quite a pivotal moment in terms of that kind
of focus on transition finance and the change in approach
to financing kind of fossil fuel companies or essentially the
high carbon sectors. And I think what's going to be
key is kind of investors getting that additional context and
(21:47):
understanding is how is the company kind of following through
on credible transition steps. So maybe shifting is slightly and
of course transition is definitely going to pass of what
are looking at going forward, But what are the products
you're seeing emerging with then the sustainable finance space, we're
seeing things like adaptation finance gaining traction and nature based products.
(22:12):
What do you see kind of emerging in the space.
Speaker 3 (22:15):
Absolutely, it's a fast evolving space. And as we're discussing earlier,
part of the evolution is just this becoming bau in fundraising,
So the more intrinsic sort of ESG investment decisions as
we were discussing. But then within the more structured space,
(22:37):
thes two types of developments as you've described, the types
of thematics is evolving. I mean, the space began largely
as a climate mitigation sort of area. And and as
you've been describing this as a significant investor demand and
also looking at climate change adaptation and looking at nature
positive investments, and it's been particular focused there also on
(23:01):
on on what we call the blue economy, so sort
of ocean water based financing opportunities, because historically those have
been under invested compared to other sustainable development goals and
and and thematics. So so absolutely in terms of the
sort of thematics that that's expanding, But what's also expanding
is the types of dead instruments where we're seeing a
(23:23):
stain of finance structural solutions. So this space again largely
began within the bond and the bank low markets, and
that's now broadening. And as I was saying, I see
my role as helping you know, corporate treasurers marry their
treasury and their sustainability goals. And of course the more
products that I have at my disposal, the easier that becomes.
(23:45):
So it's very exciting for me to see, you know,
the high yield market start to embed sustainability structures, to
see also some of the the I guess liquidity the
shorter markets such as commercial paper. Late last year we
we worked with other market a disimants to introduce guidelines
there for things like green commercial paper. There's more banks
(24:07):
rolling out esg sustainable bank deposits as well, and then
in the future the growth also if the digital capital
markets offers a lot of opportunities for even more transparent
green finance where using distributed ledger and related technologies, as
an investor, you get almost real time information on the
(24:29):
environmental impact of the investment you're making, which I think
is also has got a lot of potential so great saluted.
Speaker 1 (24:38):
Of course to biodiversity has been kind of an emerging area.
I think we would agree that nature loss and water
scarcity are presenting risks for companies and more and more
becoming integrated into company reporting and ultimately into lending decisions.
(24:58):
I'm curious to hear whether you think the market is
fully aware of the kind of nature and water scarcity dynamic,
and then maybe as a follow up question, whether you
think there will be growth in the biodiversity related product
market going forward.
Speaker 3 (25:15):
Yeah, there's definitely growing awareness on this topic, and you know,
research conducting research where specific stress as are conducted and
showing the series not just societal but but also your
hard economic impact. Biodiversity loss of water scarcity are starting
(25:38):
to spread, I think are starting to lead to this
becoming important new frontier within within within sustainable finance. I
think the reason it might be a little bit slower
to develop both risk standards and indeed on the opportunity
side new new products is is that is the data
(25:59):
around this. When it comes to course to climate change mitigation,
there's a clear carbon hierarchy. You can look at that
at the corporate level, there's relatively less localized analysis that
you need to do to get I guess, an acceptable
amount of information when it comes to nature, when it
comes to water assessments, you know, having just corporate level
(26:20):
data is insufficient. You've got to really understand where's the
company active, where there's suppliers active, and what's you know,
what are the local habitats and ecosystems that they're involved with,
and you know data around that you know is evolving.
There's some really interesting work being done around around earth DNA.
We're involved in a number of geospatial projects that again
(26:42):
try to improve the data availability there, which I think
is essential both to do proper assessments there on the
risk side, which I think will become more and more
commonplace in the same way you know many of us
are doing you know, various climate change physical risk assessment,
doing these sort of water bio very first risk assessments,
(27:03):
but then also on the opportunity side for companies to
develop targeted products that really help address specific areas in
their value chain where where there's more concerns around bio
diversity and water loss and scarcity.
Speaker 2 (27:18):
So many interesting things going on in this space, and
I think, of course data has been a big almost
blocker for investors around biodversity, and I think hearing you
talk about earlier, the kind of almost real time data
insights and environmental impacts is definitely a game changer going forward.
And as we're having these kind of amazing emerging areas
(27:41):
of sustainable finance, we're still kind of on the debate
around further aligning disparate ESG regulation and considering kind of
simplification of certain standards, particularly in Europe. How will these
trends influence the market participants.
Speaker 3 (27:57):
It's a very point that's indeed being actively discussed because
for any internationally active company or investor, you're probably facing multiple,
you know, multiple regimes when it comes to the types
of data you're required to disclose. And even if you're
(28:18):
a company to or invests only active in one jurisdiction,
if your counterparty is are subject to multiple regulation, you'll
probably be asked to give lots of different data as well.
And we don't want to be in a situation where
if I've got, you know, ten different investors, I'm going
to have ten different ESG questionnaires. So it's that consolidation
(28:40):
is important. Some of it will likely happen through the more.
I guess official channels, particularly if you look at areas
such as THERFS Foundations, International Sustainability Standards Board, that's meant
to be a global baseline as more talk about into
operability with a different national standards. But I think there's
(29:02):
also a role for the private sector here, and we're
involved with a number of initiatives that look at collaboration
across different banks, across different investors to to help set
sector specific standards around The key isg metrics that that
we that we require because there is a concern otherwise
(29:25):
that you're spending a lot of your energy, a lot
of your sustainability budget around I guess compliance and reporting
versus aren't actually getting your company or getting your your
your your funds ready for a greener, farer future future economy.
So I think that's important and I think it links back,
(29:49):
and that's why we can't forget the finance and sustainable finance.
We've got to keep thinking. Then you know, which of
these metrics that we're after from a regulatory point of view,
from an investor point of view, are truly financially material.
So get us the eighty twenty rule that can be
your thousands of metrics that we can we can ask,
we can demand our in our in our shopping list,
(30:11):
But what's kind of the twenty percent of the metrics
that will have eighty percent of the impact on our
investment decision. I think that that sort of simplification, that
back to basics will be important as well. It will
take time, right, I mean, credit analysis assessments have been
around for centuries, these types sustainability assessments maybe maybe twenty
(30:33):
thirty years, so we do have to accelerate, but we
should also be humble and realize that it will take
some time to get us to that place and it
will be iterative.
Speaker 2 (30:43):
I think that's a very good place to end, remembering
that the finance and sustainable finance and having that view
of the key financially material metrics which sometimes seems to
get lost and welst regulatory dynamics have been so important
to drive growth within the space. It still needs to
serve the purpose of focusing on those things that are
(31:04):
financially material.
Speaker 3 (31:06):
Thank you so much, Arthur, thank you for having me.
Speaker 2 (31:09):
You can find more information on sustainable finance and other
key ESG topics by going to BI Sustainable Debt on
the ESG Team Dashboard by entering BI ESG go on
the Bloomberg terminal. If you have an ESG quandary or
burning questions you would like to ask BIS expert and
this send us an email at ESG Currents at bloomberg
(31:30):
dot net. Thank you, and we look forward to the
next episode.
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory attention and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzwords
(00:29):
and lingo, and we aim to break these down with
industry experts. Welcome to ESG Currents, your guide to navigating
the evolving ESG space, one topic at a time, Brought
to you by Bloomberg Intelligence, part of Bloomberg's Research department
with five hundred analysts and strategists working across all major
(00:50):
world markets. I'm Eric Cain, director of ESG Research for
Bloomberg Intelligence.
Speaker 2 (00:56):
And i am Grace Osborne, a mere ESG integration animalist.
Today we're diving into sustainable finance as the market rebounds,
with sustainable debt issuance hitting one point sixty three trillion
dollars in twenty twenty four, and it appears to an
extent to be defined the ESG backlash as sustainable debt
issuance in the Americas had record January volumes. From Greeniam's
(01:18):
to market Integrity we'll explore the fifty trillion dollar transition
investment opportunity, the quest for measurable impact, and emerging products
from biodiversity to water shaping the future of sustainable finance.
Joining us is Dr Arthur Krabers, Managing Director and head
of Corporate Climate and ESG Capital Markets at Netwest. Arthur's
(01:38):
expertise span structuring sustainable debt, creating responsible investment portfolios, and
benchmarking corporate sustainability. Outside of Netwest, he's a visiting professor
at Strathclyde University, where he earned his PhD in finance.
We are really looking forward to getting into this conversation
with you, Arthur. Thank you so much for joining us
and welcome Hiwise.
Speaker 3 (01:57):
Thank you for having.
Speaker 2 (01:57):
Me, and perhaps as a starting point, can you give
us a bit of background around your role and involvement
and sustainable finance.
Speaker 3 (02:05):
Absolutely so. I began my career as a traditional capital
markets banker and around twenty ten, twenty eleven, so my
clients have asked me questions about these things called green bonds,
and I took an interest, and this was still very niche.
It was really a bit more of a hobby for
(02:27):
me at the time. But that started evolving to as
you described, the role I have today, which is to
head our corporate coverage within the climate ESG capital markets function,
and as I describe it is to help corporate treasury
functions become sustainable treasury functions, whereby for really any financing
(02:49):
or treasury decision, they are actively considering ESG components. So,
as you described it, there's a quite mature sustainable debt market.
That's certainly a high profile part of my role, but
it can be also more behind the scenes elements such
as thinking about your banking group, your suppliers, thinking about
(03:12):
the kind of cash management decisions that you're making, and
whether you're skewing sustainability considerations into those as well.
Speaker 1 (03:21):
Wonderful maybe as a starting point. The term sustainable finance
is something that gets thrown around quite a bit. I'm curious, Arthur,
if you could give us kind of a high level
summary of ultimately how you define the sustainable finance asset class.
Speaker 3 (03:38):
Absolutely, I would split that into I guess two segments.
I think the first sort of core definition of sustainable
finance is a financial instrument which is structure to include
a tangible sustainability component, and that could be either linked
(03:59):
to how the money is spent, or it could be
linked to the incentives inherent in the instruments, what we
call sort of KPI linked types. That's kind of my
core definition includes a sustainable finance technology. Now the expanded
definition for me is any financial instrument where the investment decision,
(04:24):
to an important extent depends on sustainability factors. And that
could be for what we quite guess for an offensive
strategy where there's a really positive sustainability story to be told,
or I guess it'll be more defensive where the investor
needs to actively consider possible esg. Controversies or concerns associated
(04:47):
with the issuer of that instrument.
Speaker 1 (04:48):
That's really interesting, and given how you kind of divided
sustainable finance into into two categories or two definitions, how
do you think the space or the landscape has ultimately
evolved over the last several years.
Speaker 3 (05:02):
So what's been an important evolution, particularly within that first,
you know, structured segment of sustainable finance, is that it's
starting to move from what was initially an industry led
you know, voluntary coalitions of the willing driven sets of
standards towards one that's becoming much more regulated where there's
(05:27):
a there's an important role for particularly you know, financial
regulators in defining how you can attach a sustainability label
to an instrument, to to to a fund, to a portfolio,
et cetera, et cetera. So that regulation has been the
main trend since since I joined in this space, and
(05:48):
and and looking ahead, what I think will be really
a critical trend as more stainble finance reporting becomes mandatory
is the expansion of that second class of stainable finance
instruments that incorporate sustainability considerations in an investment case, even
though they may not be formally structured as a green
(06:11):
bond or a stained with your linked instrument. In our mind,
that space is going to expand, and you know that
the classic debate that we're having is, you know, does
sustainability become like investment grade is referred to today, that
where if you don't meet minimum environment or social reporting
and performance standards, you start getting locked out of different
(06:35):
parts of the capital market. So looking ahead that that's
what we're spending a lot of time analyzing and assessing.
Speaker 2 (06:42):
It's interesting you're talking about that second class of sustainable
finance instruments which incorporates sustainability in the investment case but
not formally structured as sustainable products. I guess then, what
DC as the role of label debt markets like the
green bonds going forward? If sustainability is kind of becoming
that investment grade that becomes a minimum to meet certus
(07:05):
environmental and social disclosure, and what have we seen is
the role of like labeled debt in kind of driving
sustainable finance growth so far?
Speaker 3 (07:14):
Well, it's a really good question because a lot of
clients do ask us, okay, if that's your future where
everything's becoming inherently part of the investment and the credit process,
these stability considerations. It's still a role for these more
structured instruments to green bottles, a KPI linked dead instruments,
(07:35):
which are currently maybe you know, two or three percent
of the debt capital markets.
Speaker 2 (07:41):
You know.
Speaker 3 (07:41):
My view is yes, they will continue to be a
role for for these more structured instruments because they cater
to specific types of responsible and sustainable investment strategies. So,
I mean, there's there's hundreds of different same investment strategies,
but if I look, for instance, at some of the
(08:02):
impact strategies where you know, my aim is that for
every dollar that I invest, besides a financial return, I
can I can quantify some sort of environmental alpha, you know,
that type of follow the money emphasis that those kind
of strategies, green bonds, use of proceeds instruments are very
valuable because you know where the money is going. And equally,
(08:26):
if I'm developing a transition strategy and we'll get onto
that later as well, where my focus is on incentivizing
companies to decarbonize, I may well favor issuance that has
a has a KPI embedded in the instrument, whereby there's
a pricing incentive, even small, but still a pricing incentive
(08:48):
for the company to meet some of these pre agreed
decarbonization targets. So I do think even in a world
where you know this this will become more common place
sustainability investment analysis, that there will be a value in
having some of these more structured instruments for those specific
investment strategies and.
Speaker 1 (09:08):
Are there Earlier you mentioned the idea of regulation being
one of the key trends in the space over the
last couple of years. It's my take and I think
you know you would agree that a lot of the
regulation is coming about due to concerns about impact and
integrity of some of these instruments. A lot of that
concern has evolved around you know, sustainability linked bond, sustainability
(09:31):
link loans, for example. Given this extra you know scrutiny,
how ultimately can we maintain kind of the focus on
impact and integrity for sustainability link loans and link bonds.
Speaker 3 (09:45):
Yeah, no, it's it's that's absolutely right. So that the
regulation has emerged because like any you know, quickly evolving
trend in finance, the regulator what wants to ensure that
the kai kind of instruments, the kind of investment strategy
being developed, are of a high standing and certainly you know,
(10:07):
pursue the kind of things that they say they intend
to pursue. And and I think that that should be welcomed.
I think as sustainable finance practitioners, you know, we shouldn't
be blindly opting for growth in this market, where we
should be opting for responsible growth where we're any new
issuance is of a high is of a high standing.
(10:29):
And when it comes to you know, discussions like greenwashing,
maintaining market integrity, I think it's incumbent on on each
of the market participants to provide such checks and balances.
It's incumbent on on the issuer to be very thoughtful
in developing their stable finance strategy, not use it as
(10:49):
a quick to market or quick to a little bit
of extra demand. It's incumbent on the intermediary used to
sort of have a really you know, you know, robust
structuring process. It's in coming on the the investors when
they're doing their analysis that to have have some really
appropriate your questions and scorecards. So it's sort of each
of the chains of that investment and fundraising process. But
(11:12):
but you know, I am a believer that there is
an improvement cycle in this market. If I look at
the first generation of green bonds, sustainability linked bonds that
were structured, they were probably a little bit too vague
to too fanciful. And you know, I'm often asked what's
your what's your favorite sustainable finance framework or instrument, and
(11:34):
I tend to say the most recent one, you know,
because because there is that improvement cycle where companies, where banks,
where investors do learn and consider build on on each
other's approaches to market and and that's certainly what we
seen with with SLBs as well, so KPI link bonds,
where the ambitiousness of the target, where the thoughtfulness around
(11:57):
the penalties, where you know, the material reality of the
metrics being being addressed, you know, has has been improving.
Speaker 1 (12:05):
Interesting. Another area of focus for kind of standardization is
the green bond market. And you know you mentioned green
bonds just a few moments ago. So last December we
saw the EU Green Bond Standard come into play and
I think, as you suggested, you know, that's really intended
to aid transparency around allocation and impact and ultimately to
(12:28):
you know, push borrowers to get more specific around the
actual impact of the bond when issuing these dead instruments.
Here us to hear your thoughts on where you see
you know, uptake of the green EU Green Bond standard going.
Speaker 3 (12:43):
It's it's indeed a really good example of the trend
we're talking about about a degree of regulation and agree
with I guess top top down developments on this market,
and it has got quite some traction already. You know,
by our calculations, some twenty percent of green bond issuers
(13:05):
have made a best efforts commitment in their framework to
align with the EU Green bond standards, and of course
we've seen of the first generation of that in the
in the first in the first quarter. I mean our
senses that this will form a desirable if you'd like,
(13:26):
gold plated part of the green bond market will likely
have slightly separate pricing and demand dynamics, because we're already
starting to see you know, certain regulators prioritize to get
slightly preferential or exceptional treatment to EU green bond, so
that clearly will help in terms of the investor demand.
(13:46):
And then certainly if we get to sort of you know,
also different you know, carbon and financed emission treatments, But
we don't think it's going to dominate the whole of
the green bond market, or indeed the hall of the
European green bond market, because the you know, the work
involved that particularly the time a little bit less the
cost can be prohibitive for more incidental bond issuers, for
(14:12):
slightly smaller firms, for certain sectors that aren't as well
covered by the EU taxonomy at the moment, such as
telecom issuers, or indeed for lots of non European companies.
So so so a helpful gold plated standard within the
green bond market, but it's not going to be the
beyond end all of green bonds.
Speaker 2 (14:34):
Interesting, and I think as you're saying that it could
see kind of increase demand for those that meet the standard.
We've seen kind of different trends with green ms within
the space, and actually different regional trends. I think in
the Middle East they're still seeing sometimes their green bond's
going like five times they've subscribed. What do you think,
(14:56):
what are you seeing in terms of green ems and
do you think that kind of gold standard will continue
to drive maybe a slight increase in demand and price premium.
Speaker 3 (15:07):
It's it's a it's a great point, and I think
it's it's very important for us as as partitioners to
to track things like the greenium, like the diversification benefits
of these instruments, because as I said, there's there's more
work involved, so that the treasurer who's going through those
hoops wants to have that that that information. Our view
(15:31):
is that it's hard to pinpoint a specific number of
basis points across the board. The greenium will develop will
depend on certain characteristics in relation to you know, the
quality of the issuers overall environmental and transition strategy. It
will depend on the quality of the framework the projects
(15:52):
being financed, and it may also be dependent on I guess,
more traditional portfolio management considerations like the rarity value. You know,
if I'm coming from the consumer sector doing a green bond,
that's probably more undersupplied then from the utility sector. And similarly,
you know, interestingly that the dollar market is quite undersupplied
I guess for obvious reasons green bonds, but actually they're
(16:15):
the greedium because of that undersupply is a bit firmer
than in the euro bond market, for instance. So it's
a range, and that's how we have the discussion with
the issue. These are in our mind the factors that
will likely drive it, and yes, in the future that
will likely be a degree of utaxonomy alignment and potentially
also EU Green bond standard alignment as well. And I
(16:37):
guess the final thing I would say is it will
also depend on the overall yield of the offering. If
I'm being bringing a trip away sustainable bond to the
market that's only being cleared at a couple basis point
over the risk free rate there's not a lot I
can negotiate from that versus a double B offering with
a much higher yields. This potentially more and more of
(16:58):
a greenium. And I guess the only final part, which
is harder to quantify, but there is enough academic evidence
for this, is this halo benefit which which can ironically
compress the cream payer. If a company brings sustainable issuance
to market, that can also lead to excess demand on
(17:18):
other parts of a capital structure, both debt and equity.
So that's this other benefit we're discussing with treasurers, you know,
alongside the direct sort of pricing tension for the instrument itself.
Speaker 1 (17:32):
So sitting here in the US, I think one of
the topics that's been dominating the news in the last
couple of months at least has been some of the
big banks exiting the net zero banking Alliance and kind
of deciding to remove their net zero strategies. But within
that we're seeing those same banks kind of maintaining sustainable
(17:54):
finance targets. So I'd say there's kind of an increased
focus then on the sustainable finance targets, and then that raises,
of course the question that we don't have a single
taxonomy or definition for sustainable finance and ultimately what that entails.
So I'm curious to hear your thoughts on, you know,
(18:14):
how investors are ultimately you know, defining transition finance for example,
and how we can work to maintain some of the
you know, integrity in the market to capture that upside.
Speaker 3 (18:27):
Yeah, no, it's it's it's a really valid point in this.
Of course, certain regulation that you'll mandate, such as the
SFDR machine in Europe that will mandate investors to provide
their definition of sustainable investment. And as I was saying earlier,
there's hundreds of different strategies out there, so I think
(18:49):
it's unlikely that you'll get sort of consensus there. That's
investors that focus on the impact, that the investors focus
on holistic risk management, investment that focus on the ethical
side and excluding deemed sort of negative activities. But an
important one, as your question, is increasing becoming transition finance,
(19:12):
because there's this realization in the marketplace that just you know,
putting money into already green, already sort of close to
carbon neutral economic activities is insufficient. We need to start
putting money into quote unquote browner sectors, issuers, geographies and
supporting them in their improvements. That that's what additionality should
(19:35):
be about. And we we you know, quite consistently get
questions from both investors and issuers around how did I
then set up a credible transition plan a credible transition
in investment strategy, and in our mind that will depend
on on a number of factors. Clearly, there's certain issuer
(19:58):
level benchmarks that you can apply. So at the issuer
level you can look at certain scientific transition pathways such
as sign science based Targets initiative and use that within
your definition. So I guess that's the issuer level. But
then for certain investment strategies where you're investing into projects,
you know, to your point, it is helpful to have
(20:19):
a taxonomy of what are uh your transitioning activities, what's
the right type of building, retro fit, more efficient aviation
fuels to to invest in? And again there you know
we have seen certainly in the Asian markets a number
of governments propose dictionaries for that. So it'll be a
(20:40):
combination of setting standards at the issuer level around there
their sort of pathway, their commitments are targets and then
setting standards at the project level, what are what are
based on the current technology? Uh, your credible standards. And
I guess another point, and this is what's quite exciting
about salable finance. It often leads to really open dialogue
(21:00):
between the buy and the cell side. So well, we
may agree on today, is in today's definition today's acceptable
standards that should and will evolve and that should require
collaboration between the buy and the cell side because there's
unfortunately still very often big deltas between what investors would
(21:21):
like to see in terms of transition behavior, what's feasible
for most issues.
Speaker 2 (21:26):
Yeah, I think it's so interesting that it feels like
at quite a pivotal moment in terms of that kind
of focus on transition finance and the change in approach
to financing kind of fossil fuel companies or essentially the
high carbon sectors. And I think what's going to be
key is kind of investors getting that additional context and
(21:47):
understanding is how is the company kind of following through
on credible transition steps. So maybe shifting is slightly and
of course transition is definitely going to pass of what
are looking at going forward, But what are the products
you're seeing emerging with then the sustainable finance space, we're
seeing things like adaptation finance gaining traction and nature based products.
(22:12):
What do you see kind of emerging in the space.
Speaker 3 (22:15):
Absolutely, it's a fast evolving space. And as we're discussing earlier,
part of the evolution is just this becoming bau in fundraising,
So the more intrinsic sort of ESG investment decisions as
we were discussing. But then within the more structured space,
(22:37):
thes two types of developments as you've described, the types
of thematics is evolving. I mean, the space began largely
as a climate mitigation sort of area. And and as
you've been describing this as a significant investor demand and
also looking at climate change adaptation and looking at nature
positive investments, and it's been particular focused there also on
(23:01):
on on what we call the blue economy, so sort
of ocean water based financing opportunities, because historically those have
been under invested compared to other sustainable development goals and
and and thematics. So so absolutely in terms of the
sort of thematics that that's expanding, But what's also expanding
is the types of dead instruments where we're seeing a
(23:23):
stain of finance structural solutions. So this space again largely
began within the bond and the bank low markets, and
that's now broadening. And as I was saying, I see
my role as helping you know, corporate treasurers marry their
treasury and their sustainability goals. And of course the more
products that I have at my disposal, the easier that becomes.
(23:45):
So it's very exciting for me to see, you know,
the high yield market start to embed sustainability structures, to
see also some of the the I guess liquidity the
shorter markets such as commercial paper. Late last year we
we worked with other market a disimants to introduce guidelines
there for things like green commercial paper. There's more banks
(24:07):
rolling out esg sustainable bank deposits as well, and then
in the future the growth also if the digital capital
markets offers a lot of opportunities for even more transparent
green finance where using distributed ledger and related technologies, as
an investor, you get almost real time information on the
(24:29):
environmental impact of the investment you're making, which I think
is also has got a lot of potential so great saluted.
Speaker 1 (24:38):
Of course to biodiversity has been kind of an emerging area.
I think we would agree that nature loss and water
scarcity are presenting risks for companies and more and more
becoming integrated into company reporting and ultimately into lending decisions.
(24:58):
I'm curious to hear whether you think the market is
fully aware of the kind of nature and water scarcity dynamic,
and then maybe as a follow up question, whether you
think there will be growth in the biodiversity related product
market going forward.
Speaker 3 (25:15):
Yeah, there's definitely growing awareness on this topic, and you know,
research conducting research where specific stress as are conducted and
showing the series not just societal but but also your
hard economic impact. Biodiversity loss of water scarcity are starting
(25:38):
to spread, I think are starting to lead to this
becoming important new frontier within within within sustainable finance. I
think the reason it might be a little bit slower
to develop both risk standards and indeed on the opportunity
side new new products is is that is the data
(25:59):
around this. When it comes to course to climate change mitigation,
there's a clear carbon hierarchy. You can look at that
at the corporate level, there's relatively less localized analysis that
you need to do to get I guess, an acceptable
amount of information when it comes to nature, when it
comes to water assessments, you know, having just corporate level
(26:20):
data is insufficient. You've got to really understand where's the
company active, where there's suppliers active, and what's you know,
what are the local habitats and ecosystems that they're involved with,
and you know data around that you know is evolving.
There's some really interesting work being done around around earth DNA.
We're involved in a number of geospatial projects that again
(26:42):
try to improve the data availability there, which I think
is essential both to do proper assessments there on the
risk side, which I think will become more and more
commonplace in the same way you know many of us
are doing you know, various climate change physical risk assessment,
doing these sort of water bio very first risk assessments,
(27:03):
but then also on the opportunity side for companies to
develop targeted products that really help address specific areas in
their value chain where where there's more concerns around bio
diversity and water loss and scarcity.
Speaker 2 (27:18):
So many interesting things going on in this space, and
I think, of course data has been a big almost
blocker for investors around biodversity, and I think hearing you
talk about earlier, the kind of almost real time data
insights and environmental impacts is definitely a game changer going forward.
And as we're having these kind of amazing emerging areas
(27:41):
of sustainable finance, we're still kind of on the debate
around further aligning disparate ESG regulation and considering kind of
simplification of certain standards, particularly in Europe. How will these
trends influence the market participants.
Speaker 3 (27:57):
It's a very point that's indeed being actively discussed because
for any internationally active company or investor, you're probably facing multiple,
you know, multiple regimes when it comes to the types
of data you're required to disclose. And even if you're
(28:18):
a company to or invests only active in one jurisdiction,
if your counterparty is are subject to multiple regulation, you'll
probably be asked to give lots of different data as well.
And we don't want to be in a situation where
if I've got, you know, ten different investors, I'm going
to have ten different ESG questionnaires. So it's that consolidation
(28:40):
is important. Some of it will likely happen through the more.
I guess official channels, particularly if you look at areas
such as THERFS Foundations, International Sustainability Standards Board, that's meant
to be a global baseline as more talk about into
operability with a different national standards. But I think there's
(29:02):
also a role for the private sector here, and we're
involved with a number of initiatives that look at collaboration
across different banks, across different investors to to help set
sector specific standards around The key isg metrics that that
we that we require because there is a concern otherwise
(29:25):
that you're spending a lot of your energy, a lot
of your sustainability budget around I guess compliance and reporting
versus aren't actually getting your company or getting your your
your your funds ready for a greener, farer future future economy.
So I think that's important and I think it links back,
(29:49):
and that's why we can't forget the finance and sustainable finance.
We've got to keep thinking. Then you know, which of
these metrics that we're after from a regulatory point of view,
from an investor point of view, are truly financially material.
So get us the eighty twenty rule that can be
your thousands of metrics that we can we can ask,
we can demand our in our in our shopping list,
(30:11):
But what's kind of the twenty percent of the metrics
that will have eighty percent of the impact on our
investment decision. I think that that sort of simplification, that
back to basics will be important as well. It will
take time, right, I mean, credit analysis assessments have been
around for centuries, these types sustainability assessments maybe maybe twenty
(30:33):
thirty years, so we do have to accelerate, but we
should also be humble and realize that it will take
some time to get us to that place and it
will be iterative.
Speaker 2 (30:43):
I think that's a very good place to end, remembering
that the finance and sustainable finance and having that view
of the key financially material metrics which sometimes seems to
get lost and welst regulatory dynamics have been so important
to drive growth within the space. It still needs to
serve the purpose of focusing on those things that are
(31:04):
financially material.
Speaker 3 (31:06):
Thank you so much, Arthur, thank you for having me.
Speaker 2 (31:09):
You can find more information on sustainable finance and other
key ESG topics by going to BI Sustainable Debt on
the ESG Team Dashboard by entering BI ESG go on
the Bloomberg terminal. If you have an ESG quandary or
burning questions you would like to ask BIS expert and
this send us an email at ESG Currents at bloomberg
(31:30):
dot net. Thank you, and we look forward to the
next episode.
Host
Eric Kane
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