ESG Market Alert – January 2022 | Hogan Lovells

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[co-author: Russell Clay, and Nancy Ricardo]

In this alert, we provide an overview of the latest ESG developments for UK companies.

In this month’s ESG Market Alert, we cover:

  • FCA publishes final rules on climate-related disclosures for standard listed companies and regulated companies;

  • The market for ESG securities and securitization compared to other ESG debt instruments; and

  • What’s new in market practice – Companies are starting to be required to provide ESG credentials when seeking financing deals from certain banks and lenders.

FCA publishes final rules on climate-related disclosures for standard listed companies and certain regulated companies

On December 17, 2021, the FCA published its final rules on climate-related financial disclosures for standard listed companies and certain regulated companies. The key points to note are:

  • Policy Statement 21.23 confirms that the new FCA rules extend the scope of the existing requirement in LR 9.8.6 R(8) for blue chip listed companies to also apply to standard listed issuers from:

  • The continuing obligation requires standard listed companies in scope to include a statement in their annual reports for accounting periods beginning on or after January 1, 2022 adopting:

    • a comply or explain approach when including information in their annual financial report in accordance with TCFD recommendations; and

    • provide an explanation of where in the annual report (or other relevant document) the various information can be found (if applicable).

  • Policy Statement 21.24 confirms that the final rules on climate-related disclosure requirements will also apply to asset managers, life insurers and pension providers.

The full FCA publication can be viewed here.

Let’s talk about a revolution – Generalizing ESG securitizations

  • We recently published an article on the merits of securitization for advancing the ESG agenda and how it currently lags behind other ESG debt instruments. The figures show that the ESG securities market is lagging behind in terms of trading volume compared to other ESG debt instruments. AFME found that 2021 was only the second time that European ESG securitization issuance crossed the €1 billion mark compared to the US$700 billion of ESG bond issuance in 2020. In our view, There are two main constraints that hamper ESG securitizations:

    • Uncertainty on what constitutes an ESG securitization: Unlike conventional debt and loans, there is considerable uncertainty as to what qualifies as ESG securitization. This lack of clarity as to what constitutes a green or social investment makes it more difficult for issuers and investors to create a marketable product. Various forms of ESG securitizations have appeared on the market in recent years.

    • A lack of eligible assets: The lack of assets eligible for ESG securitization is not just a matter of scale, but also reflects a lack of clarity around the criteria that precisely determine what is material when looking at ESG assets today. The market struggles to navigate the complexities between entities in different industries and could benefit from an agreed framework for data and reporting to overcome some of these hurdles.

The near future of ESG securities and securitization
  • In our view, wider acceptance of ‘use of proceeds’ securitizations is crucial to kick-start the market and fund the scale-up needed to create more ESG assets. These sources of funding are increasingly readily available to large companies for ESG purposes when they have a stable and demonstrable cash flow (e.g. replacing a rental car fleet with hybrid vehicles or electrical).
  • ESG debt instruments alone may not be enough to move the dial towards a financial system that aligns more fully with compliant ESG criteria and exclude “use of proceeds” securitization risks limiting the potential scope of ESG transactions in the future.

Read the full article on ESG securities and securitization here.

What’s new in market practice?

Bond investors and lenders are increasingly requiring companies to provide their ESG credentials in financing agreements, whether or not they are seeking financing for specific ESG purposes. This is because sophisticated lenders have their own internal ESG requirements and due diligence questions that they must meet for new financing deals.

The lack of consistency between the ESG criteria and expectations of different lenders presents a challenge for companies seeking short-term financing due to the different criteria that these companies would have to meet. Over time, we expect to see further developments in industry-led initiatives to standardize ESG credentials and disclosure requirements, as well as the introduction of regulation to alleviate lender concerns. regarding ESG-washing. We will continue to report on these developments as they progress.

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