Market Wrap
ESG Wrapped — 2022
- 9fin team
•9 min read
This year marked the beginning of a shift from ambitious thinking to ambitious action in ESG. This action has coalesced into two channels: what regulators are doing, and what the market is doing.
Regulation is ramping up, particularly in Europe, and we’ve seen an array of sustainability-linked and green bonds in the high yield universe.
Ford issued a green bond worth $1.75b in August, its use of proceeds aimed entirely at Clean Transportation projects.
Faurecia issued a sustainability-linked bond (SLB) in November, although the financial utility of its SLB structure was somewhat limited (clients read more here or you can request a copy here). Likewise, we evaluated the SPT linked to Graanul Invest’s 2021 SLB, and found it to be questionable (more on that here for clients or you can request a copy here).
The 9fin ESG team has also had a busy year: we’ve launched our expansive SFDR-aligned data set, hosted three webinars, expanded our primary coverage, launched our sustainability linked instrument data set, and introduced the 9fin Educational series.
This wrap covers some highlights from the world of ESG in 2022, including our most-read ESG QuickTakes, industry trends, conference insights, and some of our favourite ESG reporting blunders.
Questionable Quotes
Throughout 2022, 9fin’s ESG team analysed numerous companies’ sustainability strategies. During that time we’ve come across all sorts of questionable quotes:
Carnival’s decorative sustainability (2021 sustainability report)
“The new Archipelago restaurant also incorporates sustainable solutions by featuring driftwood as decorative elements of the restaurant design.”
Jazz Pharma’s new carbon metric (2021 annual report)
“Jazz produces less than 650kg CO2 (scope 1 & 2) per kg of dried cannabis flower compared to 3,697kg CO2 per kg of flower from the average US cultivation site.”
Verisure’s defecation dismissal (9fin ESG QuickTake)
A Verisure sales employee was dismissed for an abnormal offence following a customer complaint that circulated social media. For unknown reasons, a Verisure employee defecated on the property of the customer in question. The employee was dismissed.
Conference Corner
We’ve been to a ton of ESG events this year. Amid the yakking and backslapping, a few statements shone through:
PRI in Person — Megan Starr from Carlyle calls out the ESG data debate:
“We spend 95% of time talking about data and only 5% of time actually using that data. How do we actually use the data that we have to drive change?”
Future of ESG Data — Craig Mackenzie from abrdn goes out on a limb:
“For the majority of our funds, climate risk isn’t material”
(Context: Mackenzie said endless TCFD reporting was tedious, and that it distracted “half of his team” from “more important ESG work”)
ESG Investing Europe — A fixed income fund manager calls out greenwashing:
“We are seeing greenwashing absolutely everywhere. In all forms.”
At the same event, Desiree Fixler (the infamous DWS whistleblower) said “enforcement is what’s needed” to address greenwashing. She was alluding to both the DWS raid and the Goldman Sachs $4m fine over greenwashing claims.
Law and order in Europe, London, and NYC
Europe
In Europe, the SFDR was the talk of the town (read 9fin’s guide here). The rule aims to streamline ESG reporting, and in conjunction with the EU Taxonomy; financial firms across Europe are getting ready for more detailed mandatory disclosures that come into force at the start of 2023.
The CSRD is another hot topic in Europe. It will mandate sustainability reporting across listed companies, large non-EU companies, and large private companies, providing the data for fund managers to comply with the SFDR; the rules come into effect in January 2024.
In September, the European Commission also published its proposal for the Corporate Sustainability Due Diligence Directive (CSDDD), which is now close to being finalised. It will oblige companies to manage human rights, governance, and environmental risks both within their own business and in external value chains.
Another standard in the works is the EU Green Bonds Regulation (EUGBR). Current expectations are for market application in 2024 or 2025.
The UK
The Financial Conduct Authority (FCA) released a consultation paper in October outlining its Sustainable Disclosure Regulation (SDR), a labelling regime for sustainable investment products. The proposal includes an anti-greenwashing rule, and is expected to come into effect in mid-2023.
The UK also mandated a Task Force on Climate-related Financial Disclosures (TCFD) reporting. As of April 2022, any retailer with over 500 employees or £500 million in turnover is obliged to take part; smaller businesses won’t have to report until 2025.
The US
Across the Atlantic, the SEC released its climate proposal in March 2022. It is intended to standardise climate-related disclosures provided by public companies; the SEC is aiming to implement it in April 2023.
In August, the Inflation Reduction Act (IRA) was signed into law, injecting $369 billion into climate investments. It represents the largest political breakthrough for clean energy in American history, and is a strong signal that clean energy is the way of the future.
Most-Read QuickTakes
TLDR: Altice International underperforms in environmental management, lacking comprehensive emissions reduction targets. It is exposed to Israeli settlements in the West Bank, and is being investigated for competition and tax violations, implying large fines.
TLDR: Ineos polymers are significant downstream pollutants, and the company’s targets to reduce plastic pollution are unconvincing. The company has lobbied for fracking in the UK, where it sources raw materials. Its ‘Project One’ plant (in Belgium) is at the centre of a high-profile court case, and the company’s environmental claims defending the project are questionable.
TLDR: In 2021, United Group was given the lowest score by the Climate Disclosure Project. The company has set ambitious emissions targets, but its performance is lagging. It has made positive steps in data privacy and security, but has also fallen prey to data breaches.
TLDR: Verisure has been associated with in price collusion, coercive sales tactics, property damage, and sexual harassment. It is being investigated over alleged customer data protection issues, although it appears to be making an effort on data privacy and cyber security.
(If you are not a client but would like to request any of these reports, please click on the relevant name and complete your details on the form - Altice International, Ineos GH, United Group, Verisure.)
Webinar Highlights
SFDR: How to approach Article 8 and 9
In this webinar, we presented a range of classification approaches for Article 8 and 9 of the SFDR. Here are two of them:
- We analysed an Article 8 fund that included both Verisure and Carnival (both of which had multiple UNGC violations), despite the fund manager stating that they exclude firms that have violated the global compact. Read 9fin’s QuickTakes (Verisure here and Carnival here for clients. If you are not a client but would like to request copies, you can request a copy of the Verisure or Carinval reports), which outline the companies’ violations in more detail
- An Article 9 fund we analysed tracks an MSCI emerging market low carbon index; however, it is a synthetic fund, so it doesn’t actually hold the assets that comprise the index. In fact, the collateral being held by this fund includes fossil fuel companies like Total, Fortrum, and Heidelberg Cement
Greenwatching: The Good, the Bad and the Ugly of ESG LevFin reporting
In this session, we outlined ESG star reporters and reporting blunders. Some standouts:
- Hannon Armstrong was a star reporter, especially in gender diversity reporting across multiple seniority levels. It also reports those who self-identify as racial or ethnic minorities and provide a breakdown of each group, as well as a “diversity of thought” breakdown. Jaguar Land Rover and WeBuild also reported in line with good practice (read more here)
- Some reporting blunders: Prax, which runs one of the largest oil refineries in the UK, reports a limited number of scope 3 emission categories, just 2.9% of the company’s total emissions. Other reporting blunders came from Cerba, Citrix, APCOA Parking, Reno de Medici and Graanul Invest (read more here)
ESG Primer - Diving into Sustainability-Linked Deal Terms
In this webinar, 9fin’s credit team highlighted the key trends seen in sustainability-linked financing.
- Sustainability-linked bonds (SLBs) and green bonds represented ~13% of total European High Yield issuance in 2022 (down from 25% in to 2021). We looked into what determines a ‘strong’ ESG package, margin ratchets and emerging ESG ‘battlegrounds’ in documentation
- We highlighted various forms of greenwashing that we came across when analysing SLBs, including coupon step-up sizes, KPI selection, testing dates and unambitious targets. Another flaw: the ability of borrowers to refinance bonds prior to the selected testing date
Podcast Favourites
PRI in Person: Net Zero Special
In this special episode, Cloud 9fin dived into net zero at the PRI in Person conference in Barcelona.
Our colleague Kat Hidalgo talked to delegates from Neuberger Berman, AllianceBernstein, BNP Paribas, and Circle Economy, while Jack David summed up the mood at the conference and the key takeaways.
Our colleague Dan Power discussed Orpea, the French care home operator, in this episode.
Concerns about Orpea’s business emerged in January 2022 following the publication of the book The Gravediggers. In response, the French government filed a criminal complaint against Orpea, whilst an independent audit verified some of the book’s accusations.
The allegations: inadequate patient care, misreporting of financial information, and untrained staff.
ESG Educational Excerpts
Who’s keeping score? — ESG ratings explained (9fin Educational)
At 9fin, we acknowledge the usefulness of scoring but also recognise the difficulty of reflecting the nuances of ESG data in a single score. Qualitative written analysis offers insights that cannot be translated into a score.
A guide to the EU’s SFDR (9fin Educational)
We often get asked questions about classifying financial products into Article 8 and 9. In this piece, we outline the differences between classifications, and highlight the difficulties with Article 8, which is increasingly becoming a “catch-all category”.
An Insider’s Guide to Evaluating Greenhouse Gas Emissions (9fin Educational)
This piece covers the regulatory outlook for emissions disclosure, key points around how companies disclose, and common pitfalls when assessing GHG emissions. We include a ‘red flag’ checklist at the end, with key issues to watch out for.
Sustainable Finance Deal Structures (9fin Educational)
The fabled ‘greenium’: when companies issue ESG-linked debt at a lower cost than vanilla debt. We believe some green bonds have demonstrated a greenium, but we see no evidence that greeniums have occured in the SLB market.
And that’s a wrap…
From 9fin’s ESG Team, Merry Christmas to all and to all a Good Night!
We’ll see you in 2023, as bring new products, expand our SFDR-aligned data set across the entire high yield universe, and continue supplying engaging educational content and in-depth deal analysis.
