In this month’s ESG market alert, we cover:

• The FCA publishes the final  rules on climate related disclosures for standard listed companies and regulated firms;

• The market for ESG securities and securitisation when compared to other ESG debt instruments; and

• What’s new in market practice – Companies are beginning to be required to provide ESG credentials when seeking financing arrangements from certain banks and lenders.

FCA publishes final rules on climate-related disclosures for standard listed companies and certain regulated firms

On 17 December 2021, the FCA published its final rules on climate-related financial disclosures for standard listed companies and certain regulated firms. Key points to note are:

• Policy Statement 21.23 confirms the new rules from the FCA extend the scope of the existing obligation in LR 9.8.6 R (8) for premium listed companies to also apply to standard listed issuers of:

  • equity shares;

  • global depositary receipts; and

  • shares other than equity shares.

• The continuing obligation requires in-scope standard listed companies to include a statement in their annual reports for accounting periods beginning on or after 1 January 2022 adopting:

  • a comply or explain approach when including disclosures in their annual financial report in accordance with the TCFD Recommendations; and

  • providing an explanation of where in the annual report (or other relevant document) the various disclosures can be found (if applicable).

• Policy Statement 21.24 confirms the final rules on climate-related disclosure requirements will also apply to asset managers, life insurers and pension providers.

The full FCA publication can be viewed here.

Talking about a revolution – Making ESG securitisations mainstream

• We have recently published an article on the merits of securitisation to drive forward the ESG agenda and the ways in which this is currently lagging behind other ESG debt instruments. Figures show that the ESG asset-backed securities market is lagging in terms of deal volume compared to other ESG debt instruments such as bonds or loans. AFME found that 2021 was only the second time that European ESG securitisation issuance had passed the €1 billion barrier compared to the US$700 billion in ESG bond issuance in 2020. In our view there are two main constraints holding back ESG securitisations:

  • Uncertainty as to what constitutes an ESG securitisation: Unlike conventional debt and loans, there is considerable uncertainty as to what qualifies as an ESG securitisation. This lack of clarity as to what is a green or social investment makes it harder for issuers and investors to create a marketable product. Various forms of ESG securitisations have come to market in recent years.

  • A lack of eligible assets: The lack of eligible assets for ESG securitisation is not just an issue of scale but also reflects lack of clarity as to criteria that accurately determine what is meaningful when looking at ESG assets today. Many companies have positive green and social policies (such as diversity policies, cycle to work schemes etc.) but the market is struggling to differentiate between those entities that have a serious commitment to green and social policies and those that do not. This has led to calls for consistent regulated requirements but these calls should be approached cautiously as over-burdening the securitisation market with further disclosure requirements at this stage could risk stifling its initial attempts to align to ESG principles.

The near future for ESG securitisation

• Focusing on securitisations based on ESG collateral alone may not be sufficient to move the dial towards a financial system which more fully aligns to conformed ESG criteria and excluding “use of proceeds” securitisations risks limiting the potential scope of ESG deals in the future.
• In fact, we believe a broader acceptance of “use of proceeds” securitisations is crucial to jumpstart the market and finance the ramp-up required to originate more ESG assets. Securitisations are becoming more readily available to larger corporations where they have a steady, demonstrable cashflow which could be used as an asset basis for investments into the ESG transition (e.g. replacing a rental car fleet with hybrid or Electric vehicles).

Read the full article on ESG  securitisation here.

What’s new in market practice?

Debt investors and lenders are increasingly requiring companies to provide their ESG credentials in financing arrangements, regardless of whether a company is seeking financing for ESG-specific purposes. This is due to sophisticated lenders having their own internal ESG requirements and due diligence queries which they need to satisfy for new financing arrangements.

The lack of consistency between different lenders’ ESG criteria and expectations presents a challenge for companies seeking finance in the short term due to the different benchmarks such companies would need to adhere to. Over time we expect to see further developments in industry-led initiatives to standardise ESG credentials and disclosure requirements, together with the introduction of regulation to alleviate lenders’ concerns over ESG-washing. We will continue to report on such developments as they progress.

ESG Counsel ™

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and -geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials.

Hear more on ESG:

Listen to our recent ESG Academy podcast episodes on Governance, and on Corporate disclosure, reporting and regulatory frameworks. Check out the series here.

How we can help:

Our knowledge of ESG matters, coupled with our sector-focused expertise and experience can help businesses navigate this complex area. In particular, we can help by:

• bringing clarity to the complex and fast developing legal and regulatory background driving ESG considerations and helping your business shape its response to those requirements, opportunities and risks;

• engaging effectively with policy-makers and regulators that will shape the environment in which your business operates;

• undertaking a sustainability and business integrity ‘healthcheck’ to identify and establish corporate purpose and clear ESG initiatives/targets;

• evaluating supply chains and procurement processes to ensure that they appropriately deal with ESG considerations;

• ensuring that governance structures are “fit for purpose” and drive appropriate behaviours within your organisation;

• evaluating best practice with regards to talent management, diversity and inclusion, employee engagement, corporate purpose, culture, reward and remuneration and tax practices; and

• in cases of crisis, assisting in responding to and dealing with that crisis.

Authored by Nicola Evans, Maegen Morrison, Patrick Sarch, Russell Clay, Katie Dunn, and Nancy Ricardo.