Investors and asset managers are driving the focus on sustainable finance and issuers can capitalize on this opportunity to thrive over the next decade, says RBC Capital Markets Managing Director and Head, Sustainable Finance, Lindsay Patrick.
“Asset managers and asset owners around the world are aligned but, to date, we haven’t seen the same alignment from the issuer sector,” Patrick told a panel at the KangaNews Sustainable Debt Summit.
“I think we’re going to see a lot of issuers change their capital expenditure plans, as well as their internal corporate development strategies if they want to align to meet investor demand in the sustainable debt markets.”
Multiple reasons for investors to look to sustainability
Patrick says that even in a market where debt is freely available, there are distinct advantages to using sustainable debt - such as green bonds and sustainability-linked loans - rather than other forms of finance.
“Companies accessing the labelled bond market generally continue to get a pricing advantage, even in this low rate, highly liquid market,” she explains. “However, there is a strategic rationale beyond just the potential pricing advantage for accessing the sustainability-linked debt market.”
Patrick says that issuing a labelled bond can be the ‘proof in the pudding’ for companies when it comes to linking ESG performance and ambitions back to their corporate strategy.
“It can help communicate your strategy and narrative back to the market,” she says.
Raising capital in a sustainable way can also potentially benefit a company’s stock price, as investors tend to reward those companies that can prove their sustainability credentials. This is especially true when they can be easily measured, as in the form of a labelled bond.
“What we see from the equity side of the market is the premium that can arise from the market by being viewed as an ESG darling. We do think there is a positive correlation for ESG leaders between the performance in equity and credit markets,” Patrick says.
Investors becoming more sophisticated
With the investor community already very active in sustainable finance, the change in the U.S. administration likely won’t markedly change their engagement, however we “…think we will see a change in the issuer community.”
Patrick says that it will be increasingly difficult for issuers in developed markets to operate without a strategy that aligns with the 2050 Net Zero emissions goal, however it will also be important for issuers to set near and medium-term emissions reductions targets.
She also believes that, as global standards become more developed, investors will become increasingly sophisticated when it comes to looking beyond the label and into the substance of financing deals.
“There are enough checks and balances in the marketplace,” Patrick says. “Questionable transactions will be called out, whether that’s for perceived ‘greenwashing’ or the credentials of the issuer themselves,” Patrick says.
Rising to the challenge
That said, Patrick resists the notion that there is a single path forward for sustainable finance. Instead, she notes that, just as the pathway towards sustainability will vary between countries and sectors, the instruments used to finance the transition to Net Zero are likely to vary too.
“Transition pathways vary for economies around the world. They’re going to be at different paces. Different technologies will be used. Different investments will be made.”
“If countries want to accelerate certain technologies and capabilities to reach their sustainability goals, I think the transition labelled issuance is a good way to do that.”
Patrick says that, as this happens, underwriters have a role to play in helping issuer clients meet investors’ due diligence requirements on ESG factors.
“When it comes to sustainable finance, the investors we speak to want to see more innovation, more participants, more sectors and more geographies,” she concludes.
