PERSPECTIVE SERIES: GLOBAL AND ASIA PACIFIC THEMES IN …€¦ · The private sector will have to...

PERSPECTIVE SERIES:

HONG KONG AND SINGAPORE

JUNE 2020

GLOBAL AND ASIA PACIFIC THEMES IN ESG FINANCING

|CLIFFORD CHANCE 2PERSPECTIVE SERIES: GLOBAL AND ASIA PACIFIC THEMES IN ESG FINANCING

OVERVIEW

ESG: the Asia Pacific perspective

Climate change and ESG

Product review: Bonds

Product review: Loans

Regulatory and policy developments

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Opportunities and risks for

financial institutions


2100 WARMING

PROJECTIONS

Emissions and expected

warming based on pledges

and current policies

Projections for the rise in average global temperature paint a bleak picture –

current policies (even if fully implemented) predict 3.2°C rise by 2100

THE BLEAK PICTURE

CLIMATE CHANGE AND ESG


Climate impacts 'to cost world $7.9 trillion' by 2050

THE ECONOMIC IMPACT

CLIMATE CHANGE AND ESG

ECONOMIC IMPACTS OF

CLIMATE CHANGE

Average real GDP loss by 2050


• EU Sustainable Finance Action Plan

• FSB Task Force on Climate Related Disclosure (TCFD)

• ICMA Green Bond Principles

• LMA Green Loan Principles

• FCA Climate Change Feedback Statement

(October 2019)

• PRA Policy and Supervisory Statements

• Climate Financial Risk Forum

• G20 Green Finance Study Group

• Network for Greening the Financial System

• UK Green Finance Task Force & UK Green Finance

Institute

• EU Green Deal

• EU Climate Law

• EU Sustainable Disclosure Regulation

• EU Low Carbon Benchmark Regulation

• EBA Action Plan on Sustainable Finance

There are huge number of regulatory and policy initiatives in the area, many of which

will impact banks and their clients.

OVERVIEW

REGULATORY AND POLICY DEVELOPMENTS


The EU Sustainable Finance Action Plan is part of a

wider drive to meet EU climate and energy targets.

EU SUSTAINABLE FINANCE ACTION PLAN


Source: European Commission

The EU committed to three ambitious climate and energy targets for 2030

in line with the UN 2030 Agenda, the SDGs and the Paris Agreement.

In its long-term strategy, the EU strives for net-zero GHG emissions by 2050.

Public supporting schemes alone will not be sufficient to meet those investment needs.

The private sector will have to play a huge role and a smart policy framework is needed to incentivise private investment.

Public money Private money

The yearly investment gap to meet these targets

is estimated to be

around €180 billion.

Minimum 40% cut in

greenhouse gas emissions

compared to 1990 levels

At least a 32.5% energy

saving compared with the

business-as-usual scenario

At least a 32% share of

renewables in final energy

consumption


In January 2018, the EU High Level Expert Group on Sustainable Finance produced its

final report. In March 2018, the Commission published the Sustainable Finance Action

Plan, its "roadmap" for implementing sustainability into the EU financial system.

EU SUSTAINABLE FINANCE ACTION PLAN (CONT.)


1. Establishing an EU classification system for

sustainable activities (“The Taxonomy”)

6. Better integrating sustainability in ratings and market

research

2. Creating Standards and labels for green financial

products

7. Clarifying Institutional Investors’ and asset managers’

duties (“The Disclosure Regulation”)

3. Fostering investments in sustainable projects 8. Incorporating sustainability in prudential requirements

4. Incorporating sustainability when providing financial

advice

9. Strengthening sustainability disclosures and account

rule making

5. Developing sustainability benchmarks10. Fostering sustainable corporate governance and

attenuating short-termism in the capital markets




PROGRESS ON KEY ACTIONS OF THE ACTION PLAN




TIMELINE OF KEY ACTIONS OF THE ACTION PLAN


• On 15 April 2020, the European Council adopted the “EU Taxonomy”

regulation. The regulation now needs to be adopted by the European

Parliament at second reading before it can be published in the Official Journal

and enter into force.

• The Taxonomy will embed a taxonomy for environmentally sustainable

activities into EU law so that the classification system can be used in different

areas, for example labels, standards and benchmarks.

• The Taxonomy sets out the criteria for determining if an activity (not a

company or asset) is environmentally sustainable, but leaves future

delegated regulations to detail the Technical Screening Criteria.

• Will apply to any EU or national regulator that sets out requirements relating

to financial products or corporate bonds that are marketed as environmentally

sustainable, to financial market participants in relation to offering financial

products, and to non-financial statements prepared by large public-interest

entities.

• Any company which intends to issue green bonds in accordance with the

proposed EU Green Bond Standard will be required to demonstrate that

proceeds are used only for Taxonomy-aligned activities.

The Taxonomy is the EU’s attempt to develop a classification system for determining if

an economic activity is environmentally sustainable

EU SUSTAINABLE FINANCE ACTION PLAN – THE TAXONOMY



When is an activity environmentally sustainable?

EU SUSTAINABLE FINANCE ACTION PLAN – THE TAXONOMY (CONT.)


Must comply with additional specific technical screening criteria

Must comply with OECD guidelines, UN guiding principles on business and human rights, ILO declaration on fundamental rights and principles at

work and International Bill of Human Rights

Must not “significantly harm” any of the environmental objectives

Must “contribute substantially” to one or more of the environmental objectives or be a transitional or enabling activity


Timeline



December

2020

December

2021

December

2022


Technical screening criteria

Taxonomy Technical Report: coverage examples



Coal

No

Gas

Potentially

Construction,

real estate

Potentially

Nuclear

Not currently

Maritime transport

and aviation

Not currently

|CLIFFORD CHANCE 14PERSPECTIVES SERIES

March 2020: Proposed EU target of net zero greenhouse

emissions by 2050

• By 2050, any future GHG emissions in the EU must be matched by removals

of GHGs

• Impact on existing 2030 targets:

– Will require EC to review its current target to reduce GHG emissions by 40%

by 2030 – up to a 50/ 55% reduction may need to be targeted

• Post-2030 trajectory:

– Climate Law will empower the EC to set an EU-level trajectory to meet the

2050 target without Member State/ EU Parliament approval

• Achieving the 2050 target will require implementation of the full range of policy

measures set out in the EC’s 2019 Green Deal

EU CLIMATE LAW



Clarifying institutional investors’ and

asset managers’ duties

• Harmonisation of disclosure requirements for financial

market participants and financial advisers

• Sustainability risks should be integrated into financial

market participants’ investment decision-making/

advisory processes

– Integration remains a key concern: NGFS Status

Report in May 2020 noted that there was still

insufficient integration of ESG analysis into risk

management frameworks

– Financial institutions instead tend to classify ESG risk

management measures separately, as part of CSR

measures or mitigation measures for reputational

risks

EU SUSTAINABLE DISCLOSURE REGULATION


Key specific disclosure requirements include:

“Principal adverse impact of investment decisions

on sustainability factors”

Policies on integration of sustainability risks into

the investment decision-making/ advisory process

Additional information on products promoting

social or environmental characteristics/ with the

objective of sustainable investment

Specified platforms for disclosure: website, pre-

contractual documents, remuneration policies etc.

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EU Low Carbon Benchmarks Regulation

• Two categories of financial benchmarks created to help

investors measure the carbon footprint of their investments

– EU Climate Transition Benchmarks

– EU Paris-Aligned Benchmarks

• April 2020: EC publishes sets of draft Commission

Delegated Regulations

EU LOW CARBON BENCHMARKS REGULATION AND EBA

ACTION PLAN FOR SUSTAINABLE FINANCE


EBA Action Plan on Sustainable Finance

• EBA work aimed at (1) improving the regulatory framework for

institutions to foster their operations in sustainable manner and (2)

providing supervisors with tools to monitor and assess ESG risks

• Between 2019 – 2025, the EBA will, in relation to:

– Strategy and risk management: assess the development of a

uniform definition of ESG risks, methods for understanding the

impact of ESG risks on institutions etc.

– Key metrics and disclosure: develop technical standards to

implement disclosure requirements in the CRR.

– Stress testing: develop climate change stress test to identify banks’

vulnerabilities to climate-related risk

– Prudential treatment: assess if dedicated prudential treatment of

exposures related to activities associated substantially with ESG

objectives would be justified

• Institutions encouraged to take steps in the first three areas above.


SINGAPORE

ESG: THE ASIA PACIFIC PERSPECTIVE

Sustainable Finance Initiatives

• Sustainable Bond Grant Scheme

• IFC-MAS Partnership

• ABS Guidelines on Responsible

Financing

• Sustainable Insurance Forum

• Asia Sustainable Finance Initiative

• Singapore Stewardship Principles

• Network of Central Banks and

Supervisors for Greening the Financial

System

• Jobs and training

US$200b per year estimated

green investment needed in

ASEAN till 2030

>80% of top asset managers in

Singapore are already UN PRI

signatories

57 investment organisations

expressing support for the

Singapore Stewardship

Principles

MAS working on a

comprehensive, long-term

strategy to make sustainable

finance a defining feature of

Singapore’s role as an

international financial centre


• Hang Seng Indexes launches two new ESG benchmarks (14 May 2020)

• HKMA Circular on Common Assessment Framework on Green and

Sustainable Banking (13 May 2020)

• Joint statement on the establishment of the Green and Sustainable Finance

Cross-Agency Steering Group (5 May 2020)

• Launch of Hong Kong Quality Assurance Agency Sustainability Linked Loan

Assessment Service (2 January 2020)

• HKEx publishes ESG Guide consultation conclusions and ESG disclosure

review findings (18 December 2019)

• Report on the results of SFC survey on ESG, climate change and asset

management (December 2019)

An acceleration in momentum for initiatives to integrate ESG considerations and

factors into the financial services industry and business environment in Hong Kong

HONG KONG



• Key part of Phase I measures to promote green and sustainable banking

(announced on 7 May 2019) was to develop a common framework to assess

the “greenness baseline” of Ais

• HKMA has now developed a self-assessment framework

• Key aspects of the assessment framework:

– Objective: Intention is to facilitate AIs in reviewing readiness and

preparedness for climate and environmental risks, help formulate

strategies and approaches, and inform the design of supervisory

expectation and requirements under Phase II.

– Design: Collect information about climate and environmental risks under

six key elements, including (i) governance, (ii) corporate planning and

tools, (iii) risk management process, (iv) business policies, products and

services, (v) performance and resources, and (vi) disclosure and

communication.

– Scope of AIs and timeline: implement the assessment on around 50 AIs

based predominantly on their asset sizes and business activities; 12

weeks to complete assessment

HKMA Circular on Common Assessment Framework on Green and

Sustainable Banking

HONG KONG (CONT.)


https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200513e1a1.pdf


• The Steering Group aims to:

– coordinate the management of climate and environmental risks to the

financial sector

– accelerate the growth of green and sustainable finance in Hong Kong

– support the Government’s climate strategies

• Through:

– examining policy and regulatory issues;

– facilitating policy direction and coordination to ensure Hong Kong has a

cohesive and comprehensive green and sustainable finance strategy;

– addressing technical cross-sectoral issues;

– tracking international and regional trends, issues and developments in

green and sustainable finance, and considering how Hong Kong should

better position itself and provide leadership in the region and globally; and

– identifying areas where Hong Kong can promote its strengths and thought

leadership

Joint statement on the establishment of the Green and Sustainable Finance Cross-

Agency Steering Group

HONG KONG (CONT.)


Initiators:

• Hong Kong Monetary Authority

• Securities and Futures Commission

Members:

• Environment Bureau

• Financial Services and the Treasury Bureau

• Hong Kong Exchanges and Clearing Limited

• Insurance Authority

• Mandatory Provident Fund Schemes Authority


• HKEx will implement the consultation proposals, with modifications, which will

be effective for financial years commencing on or after 1 July 2020.

• Key changes to the ESG Guide and related Listing Rules include:

1. Introducing mandatory disclosure requirements to include:

- a statement setting out the board’s consideration of ESG matters;

- application of Reporting Principles “materiality”, “quantitative” and

“consistency”; and

- explanation of reporting boundaries of ESG reports.

2. Requiring disclosure of significant climate-related issues which have

impacted and may impact the issuer;

3. Amending the “Environmental” key performance indicators (KPIs) to

require disclosure of relevant targets;

4. Upgrading the disclosure obligation of all “Social” KPIs to “comply or

explain”; and

5. Shortening the deadline for publication of ESG reports to within five

months after the financial year-end.

HKEx publishes ESG Guide consultation conclusions

and ESG disclosure review findings

HONG KONG (CONT.)


https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/May-2019-Review-of-ESG-Guide/Conclusions-(December-2019)/cp201905cc.pdf

https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Environmental-Social-and-Governance/Reports-on-ESGPD/esgreport_2018.pdf?la=en


• On 9 June 2020:

- ICMA updates Social Bond Principles

- ICMA publishes Social Bond Impact Reporting: Working Towards a

Harmonized Framework for Impact Reporting for Social Bonds

- ICMA publishes the sustainability-linked bond principles (SLBP)

voluntary guidelines

- ICMA publishes: Social and Sustainability Bond Case Studies:

Examples from Frameworks applied in Capital markets

• EU Green Bond Standard

A wave of new principles, guidelines and standards

BONDS

PRODUCT REVIEW

https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Social-Bond-PrinciplesJune-2020-090620.pdf

https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Harmonized-Framework-for-Impact-Reporting-for-Social-BondsJune-2020-090620.pdf

https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Sustainability-Linked-Bond-PrinciplesJune-2020-090620.pdf

https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Social-and-sustainability-bond-case-studiesJune-2020-090620.pdf


• This edition provides a definition of a social issue which may benefit from a

social project:

“A social issue threatens, hinders, or damages the well-being of

society or a specific target population”.

• It also includes an expansion of examples of project categories and target

populations

• Target populations - those that are: (1) Living below the poverty line, (2)

Excluded and/or marginalised populations and /or communities, (3) People

with disabilities, (4) Migrants and /or displaced persons, (5) Undereducated,

(6) Underserved, owing to a lack of quality access to essential goods and

services, (7) Unemployed, (8) Women and/or sexual and gender minorities,

(9) Aging populations and vulnerable youth, and (10) Other vulnerable

groups, including as a result of natural disasters

• Social Bond Impact Reporting: Working Towards a Harmonized Framework

for Impact Reporting for Social Bonds (June 2020).

Social Bond Principles (June 2020)

BONDS

PRODUCT REVIEW

Project Categories:

• Affordable basic infrastructure

• Access to essential services

• Affordable housing

• Employment generation

• Food security and sustainable food systems

• Socioeconomic advancement and empowerment

Especially but not exclusively for “Target Populations”

https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Harmonized-Framework-for-Impact-Reporting-for-Social-BondsJune-2020-090620.pdf


Sustainability-Linked Bond Principles (June 2020)

BONDS

PRODUCT REVIEW

• These relate to bonds where certain terms (usually the interest rate) vary

depending on meeting (or not) sustainability targets/KPIs, rather than being

the traditional "use of proceeds" green bonds, where proceeds have to be

applied to sustainable investments (for sustainability-linked bonds you can

use the money for whatever you like – although if you start investing in coal

plants you are likely to get some investor complaints).

• They build on the work of the LMA sustainability-linked loan principles.

Five core components:

• Selection of Key Performance Indicators (KPIs)

• Calibration of Sustainability Performance Targets (SPTs)

• Bond characteristics

• Reporting

• Verification


As part of the Sustainable Finance Action Plan, the EU Technical

Expert Group has developed new voluntary EU Green Bond

Standard harmonised with its work on the EU taxonomy.

Similar to existing standards

• Remains a “use of proceeds” standard with similar characteristics to the

ICMA GBP

• Green bond framework

• Reporting at least annually

A few key differences

• Use of proceeds aligned with the EU taxonomy (or its principles until fully

developed)

• Third party verification will be mandatory

• Verifiers will need to have external accreditation (ultimately by ESMA)

Recommendations to encourage growth

The New EU Green bond standard

BONDS

PRODUCT REVIEW


• On 12 June 2020, the European Commission launched an Consultation:

Targeted consultation on the establishment of an EU Green Bond Standard.

• The Consultation is open until 2 October.

• The Commission is considering how to take the recommendations of the

TEG forward. The consultation is designed to gather further input of a

technical nature from relevant stakeholders in the green bond market, in

particular issuers, investors and related service providers.

The New EU Green bond standard (Cont.)

BONDS

PRODUCT REVIEW

https://ec.europa.eu/info/consultations/finance-2020-eu-green-bond-standard_en


Recent Developments

BONDS

PRODUCT REVIEW

Asia Pacific:

• Agricultural Development Bank of China’ s “COVID-19” Bonds

• Republic of Indonesia’s “COVID-19” Bonds

Transition bonds

• Castle Peak Power Co’s energy transition bond (June 2020).

Transactions aligned with EU Taxonomy

• In Europe, issuers such as Rabobank are beginning to align their Green

Bond Framework with the current draft of the EU-Green Bond Standard on

a best-efforts basis

Sustainability Step-ups/Step-downs

• Margin varies depending on how borrower performs against certain

sustainability criteria - CO2/greenhouse gas emissions, ESG score etc.

• ENEL recently issued USD and EUR sustainability linked bonds with step-

ups linked to 1) renewable energy; and 2) GHG emission targets


LOANS

PRODUCT REVIEW

Green Loans SLLs

Core

component

Use of proceeds. Performance against SPTs.

Incorporation

of ESG

considerations

GLP include a non-exhaustive list of categories of

eligibility for green loans (e.g. renewable energy,

climate change adaptation, green buildings)

SPTs tied to ESG considerations. SPTs can be (i) internal

(bespoke to the borrower’s business) and/or (ii) external (set

against a borrower’s ESG performance in relation to its peers).

Materiality assessments should be undertaken to identify the most

important ESG considerations to the borrower’s business.

Reporting

requirements

Borrowers should maintain information on the use of

proceeds, which should be updated annually.

Methodologies used to calculate performance

indicators should be disclosed.

Borrowers should report on SPTs at least annually, and confirm

any change in the calculation methodology used.

Documentation No template wording available. However,

documentation should clearly set out:

• Use of proceeds provisions – eligible green

project categories

• Information covenants – covenants relating to

the green projects

• Representations – a representation as to the

accuracy of reporting

• Any “green” breaches and their consequences

No template wording available. However, documentation should

clearly set out:

• SPTs – source and level of each SPT, and how it has been

established

• SPT measurement – mechanism for measurement of

improvement (e.g. absolute value or percentage change in a

metric)

• Sources of information – what information is being relied on

for measuring SPTs and any independent verification

requirements

• Any “sustainability” breaches and their consequences

APLMA/ LMA/ LSTA Guidance on Green Loan Principles and

Sustainability Linked Loan Principles


Changes in ESG rating

methodologies

• History of frequent changes: e.g.

Sustainalytics running (1) legacy

system with higher scores for

better ESG performance and (2)

new system with lower scores

for low ESG risk

• Ensures reporting standards

remain relevant, as changing

methodologies reflect changing

perceptions of risk

Market precedents – Green and

sustainability-linked loans

• US$65m revolving capital call

facility for Quadria Capital, the first

capital call facility in the world to link

the interest rate of a private equity

fund to the sustainability

performance of its portfolios.

• €1.5b revolving facility for Nokia

Corporation where the pricing was

linked to Nokia’s reduction of

greenhouse gas emissions, both

from its own operations and those

attributable to customers’ use of its

products.

• US$400m GLP-compliant facility

for ICBC to be used for green

projects in line with ICBC’s newly

established Green Finance

Framework.

PRODUCT REVIEW

Evolving ESG due diligence

standards

• January 2020: LSTA publishes

inaugural ESG Diligence

Questionnaire, focusing on a

company’s:

1. ESG governance

2. Relevant ESG frameworks

3. Relevant ESG factors

4. Breakdown of revenue.

• February 2020: ELFA publishes

ESG Investor Survey and forms a

working group to promote ESG

investing across European loan and

bond markets.

LOANS

|CLIFFORD CHANCE

Risk management.

Establish processes for monitoring and managing own exposures

to climate change including physical, transition and liability risks.

Monitoring sustainable finance

regulatory developments and

advocacy.

Firms will need to have processes in place

for monitoring regulatory developments

and to allocate responsibility for

responding to consultations, engaging with

trade associations etc.

Internal monitoring and record keeping.

Establish policies and procedures to track green

products produced by the firm to monitor compliance

with new legislation and guidelines, as well as any

use of proceeds or sustainability requirements under

green or sustainability-linked loans

Adaptation to incoming legislation.

Firms will need to have projects and expertise in place to adapt

to the systematic inclusion of ESG and sustainability

considerations into incoming legislation including the EU

Disclosure Regulation, MiFID II, the Taxonomy Regulation, SRD

II and the Benchmarks Regulation.

Sustainable finance requirements

will have firm-wide impact –

ensure that there is appropriate

input to other projects.

Firms should make sure that their team(s)

focussed on ESG issues also have input

into other projects which may have an ESG

element but which are led by other teams.

PERSPECTIVE SERIES: GLOBAL AND ASIA PACIFIC THEMES IN ESG FINANCING

ACTIONS POINTS FOR FINANCIAL INSTITUTIONS


REGULATORY

AND POLICY

DEVELOPMENTS

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A RANGE OF RISKS AND OPPORTUNITIES FOR

FINANCIAL INSTITUTIONS.

WHAT ARE THE OPPORTUNITIES AND RISKS FOR

FINANCIAL INSTITUTIONS?

• Development of new products and new

business lines

• Expertise in the sector is increasingly a

differentiating factor

• CSR - Making a positive impact on ESG

matters

• Green growth as growth story of 21st

century?

• Clients and investors increasingly

focused on ESG

• Brand perception – opportunity to be and

be seen as a market leader

• Regulatory change will require

engagement, amendments to policies

and processes (particularly in relation to

disclosure), audit and compliance

oversight etc.

• What risks arise from marketing products

like green bonds?

• Additional human and technical

resources needed to adapt to new rules

– for example, new rules require

disclosure on environmental, not just

financial, risks

• Litigation/shareholder activism risks –

how are they assessed and monitored?

• Physical risks to assets from climate

change – how are they assessed and

monitored?

Oppo

rtunitie

sR

isks

|CLIFFORD CHANCEPERSPECTIVE SERIES: GLOBAL AND ASIA PACIFIC THEMES IN ESG FINANCING

KEY CONTACTS

Matthew Fairclough

Partner

T: +852 2825 8927

E: [email protected]

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Mark Chan

Partner

T: +852 2826 3424


Joanne Chan

Senior Associate

T: +65 6506 1966


Andrew Hutchins

Partner

T: +65 6661 2060


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