Sustainable debt set to yield harmonization dividend

By Sarah Thompson
Published August 19, 2021 | 5 min read

Global sustainable debt issuance continues to grow while harmonization of standards remains a work in progress.

Global issuance of sustainable debt may surpass USD$1 trillion this year as corporate and financial institutions face growing pressure to boost their environmental, social and governance (ESG) credentials.[1] Harmonization of standards and improvements in measuring impact are expected to provide an additional spur for issuers and investors.

‘Net Zero’ pledges boost green bonds

Sustainable debt sales in the first half of 2021 have more than doubled year-on-year to be on the cusp of eclipsing the $700 billion in issuance for the whole of 2020. Green bonds, driven by the widespread adoption of ‘Net Zero’ commitments, have accounted for more than a third of new issuance in 2021, while social bonds and sustainability-linked bonds have also recorded stellar gains.

Harmonization still a work in progress

Along with innovation in data capture and analysis, the increasing ‘Net Zero’ commitments by governments, financial institutions and corporations are pushing the market toward mandatory disclosure regimes, such as the recommendations set by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

However, harmonization of standards remains a work in progress, said Sarah Thompson, Global Head of Sustainable Finance at RBC Capital Markets and panelist at the recent Kanga News Sustainable Debt Summit.

“To really see traction we need consistency, comparability and consensus around the best practice ESG disclosure standards and frameworks,” added Thompson.

“Having taxonomies that create alignment around what are sustainable activities will really help, recognizing of course that there is still room for flexibility.

“There still needs to be recognition of regional and sectoral contexts and differences. All of these factors will combine to support further growth in the sustainable debt market.”

Seeking consensus to strengthen product offerings

One of the key tasks facing the market is reaching consensus on how to measure the impact of ESG investment amid an array of metrics and measurement frameworks. An agreed framework would provide greater comfort for issuers and borrowers in measuring risk and pricing products.

“The market has done a good job in terms of tracking outputs but not necessarily in measuring outcomes and attributing those outcomes to financing specifically,” said Thompson.

“With the increased focus on disclosure and transparency and now on impact, we’ll start to hopefully see capacity being built in this realm to improve on our impact measurement efforts and support better capital allocation.”

A bigger impact through measurement

Improvements in impact measurement are likely to provide further impetus to soaring demand for sustainability-linked (SL) instruments as participants build rigor into setting achievable and trackable targets. The growth in SL loans has prompted some industry analysts to question whether they are now the transition finance instruments of choice despite lacking the ‘transition’ label as described by International Capital Market Association (ICMA) guidance.

Though the uptake of transition-labelled use of proceeds (UoP) instruments has been relatively slow compared to SL loans, it may be premature to declare they no longer have a role to play in the market.

ICMA only recently issued its Handbook on climate transition finance and it will take the market time to adopt its principles, said Thompson.

There also needs to be more clarity around the definition of eligible transition activities.

“Overall, investors are very enthusiastic and supportive of sustainability-linked debt but nonetheless there is a heightened level of scrutiny around the credibility of targets and also the challenges of measuring the impact of general corporate purpose instruments,” said Thompson.

“For some investors there is still a preference for UoP debt and thus a role to play for transition-labelled UoP bonds going forward.

“Transition’s really a theme that can be woven through the sustainable debt market, whether it’s a sustainability-linked loan, a sustainability bond or even a green use of proceeds instrument.”

Collaboration key for setting performance indicators

An ongoing consideration for lenders, borrowers and investors is how to set meaningful and measurable key performance indicators (KPI) that align with corporate strategies while not over-complicating product structures. The process of setting KPIs may involve conducting stress-tests and bringing in external verifiers to ensure they are both ambitious and credible. In setting KPIs, there is an opportunity for lenders to work collaboratively with their clients and with other lenders in the syndicate to raise the bar.

“If questionable structures are being brought to market the syndicate has a responsibility to ask questions and to share constructive feedback. That delivers a message across the market about what really is best practice,” said Thompson.

While efforts to build rigor in sustainable finance through harmonized standards have raised industry barriers, clearer expectations have been welcomed by investors and issuers. Experienced borrowers are returning to the market for second issues because they understand what is required. There is also an acceptance that the sector is still maturing and will strengthen with improved disclosure.

“It’s well recognized that this is a journey. While the barriers to entry have become higher and the expectations are also higher, there is also a recognition that this is very much a work in progress.

“There is opportunity to improve and the key is transparency.”


[1] Institute of International Finance (July 22) Green Weekly Insight

Sarah Thompson

Sarah Thompson
Global Head, Sustainable Finance

ESGHarmonisationStandardsSustainable DebtSustainable DebtUse of Proceeds