Sustainable finance volumes fell off a cliff last year as part of a broad retreat in capital markets activity and as a backlash against ESG ensued. According to Refinitiv, for the first nine months of last year, the latest period for which data are available, sustainable finance bonds fell 26% to $586bn, although sustainable loans fared better, down just 3% to just over $500bn.
Against this backdrop, Olivier Menard, head of green and sustainable finance for Asia Pacific at Natixis, explains why he thinks last year’s fall in issuance is unlikely to alter the trajectory of sustainable finance in the region, how the region compares to Europe with regards to the development of sustainable finance frameworks, and much more.
How has interest in sustainable finance been impacted by the drop off in new issuance?
I wouldn’t talk about interest. I would talk about it becoming an imperative as an issuer to gain access to liquidity. There is an alignment of the planets on that topic. Access to liquidity will be driven by transparency and clarity on ESG aspects in years to come.
If, in a group of companies in a given sector, there is one lagging behind, clearly it will be a challenge for that company to get access to equity and debt. It’s now something that’s core to the analysis of investors and banks.
Adding to this, you have the regulation, which is significantly advancing. As at January 2023, notably in Europe, you have CSRD [the Corporate Sustainability Reporting Directive], as well as the SFDR [the Sustainable Finance Disclosure Regulation], so Article 8 and Article 9 classifications are now well in place.
ESG has been a topic that has been mostly driven by Europe in recent years, but you see this happening in Asia now. In China there is the taxonomy, and the different exchanges Hong Kong, Singapore and Australia are beefing up their ESG disclosure requirements. While not at the level of Europe, it’s gradually improving.
How does Asia compare to Europe when it comes to the development of sustainable finance disclosure frameworks?
It is still lagging behind, but Asia is very much fragmented. You cannot compare India with Australia. Japan and Australia are clearly the frontrunners. You see a strong push in Australia in sustainable finance and Japanese investors are also very much aware of the topic and are well advanced.
The rest of Asia is trailing behind but again regulations and market disclosure rules are beefing up as we speak, as well as taxonomies. When you look at the development of taxonomies in Hong Kong, in Singapore and in Australia, though it’s not there yet, there is a strong willingness from regulators in these countries to come up with robust taxonomies. The difficulty of course then becomes harmonisation and how to navigate between all those different taxonomies. Interoperability will be fundamental to taxonomy development and usability moving ahead.
What impact has the recent focus on greenwashing had on the development of sustainable finance frameworks?
You’ve had a few greenwashing cases in Apac lately. There’s been a bit of a buzz around the last Hong Kong Airport Authority’s green bond issuance because the development of the airport will obviously have an impact on biodiversity, so there are a number of articles on that topic.
What does it mean? It means sustainable finance was until recently only a potential reputational risk. You were issuing a green bond, the market may tell you yes, it’s not exactly a green bond because the regulation wasn’t there. Now the risk is not only reputational; it’s legal and a legal risk may have an impact on your P&L.
It’s not the same game. It’s becoming more regulated, which is good and allowing sustainable finance to gain in credibility, allowing investors to have more transparency on what they are investing in and issuers to be more careful on what they are claiming and doing. It impacts our role as an adviser as well. When we design a sustainable transaction for our clients, we make sure that we don’t cross the yellow line.
Are there any recent developments at Natixis our readers should be aware of?
There is one aspect we haven’t covered, which is very much specific to Natixis CIB, which is a tool we started to develop in 2017 aiming to align our balance sheet with the Paris Agreement decarbonisation trajectory, and that has been effective since 2019; it’s a tool that we call the green weighting factor. It’s quite unique in the financial institution space.
The tool is allowing us to score each and every financing we have on our balance sheet. It’s a climate score with seven colours ranging from dark green to dark brown with: three shades of green (light, medium and dark), three shades of brown (light, medium and dark) and a neutral purple. And depending on the colour that is being attached to a given financing, we are adjusting the risk-weighted assets of the given financing.
We have been colourising each and every line of our balance sheet, allowing us to monitor and assess the transition of our own book. Why? Our book is mostly Scope 3. Our Scope 1 and Scope 2 as a bank are relatively limited. So having the capacity to assess the climate impact of our portfolio is extremely important. We have been doing this for now for four years.