As sustainability concerns rise up the agenda, issuers and investors alike need to take a holistic approach to ESG financing, says UniCredit's Antonio Keglevich
Environmental Finance: What are your expectations for volumes in the sustainable bond market in 2022?
Antonio Keglevich: We're anticipating strong continued growth. After totalling $904 billion in 2021, we are forecasting that the ESG bond market will break the $1 trillion barrier this year, reaching $1.3 trillion in global primary issuance. Within that, our analysts are forecasting that green bond supply will reach $560 billion, that sustainability bonds will almost double, to €300 billion, and the issuance of sustainability linked bonds [SLBs] will more than double, to $250 billion. The one area of the market that we expect to shrink is social bond issuance, which we expect to fall to €190 billion, as issuance of COVID-19 bonds declines.
EF: What does this increased supply imply for the premium that investors are prepared to pay for sustainable bonds?
AK: Increases in supply are leading some market participants and commentators to speculate that the 'greenium' that ESG bonds command will decline or disappear in the months to come.We disagree. Despite this substantial increased supply, we expect the greenium to persist. This is for the simple reason that we are expecting demand to grow more rapidly than supply.
An important driver for this is the EU's Sustainable Finance Disclosure Regulation [SFDR], which will encourage demand among asset managers for greater volumes of eligible sustainable investments. We believe that particularly strong investor demand for funds with the darker green 'Article 9' classification under the SFDR will help drive demand for ESG bonds.
In addition, we see the growth in ESG bond ETFs [exchange-traded funds] as an accelerant. These funds grew more than 800% in the two years to end-October, and now account for around €16 billion in assets. Because these often track indexes, they tend to have little or no opportunity to trade greenness for yield, which will push up the greenium.
EF: How is the approach of your corporate clients to the sustainable finance market evolving?
AK: There are dramatic changes underway in terms of client expectations. We are now entering a phase where it's not a question of simply having the right ESG-related finance solution, but rather ensuring that the company can go into the market with the right ESG narrative.
What we are seeing is growing demand from clients who are asking us for a more holistically driven ESG advisory service; not so much from the large-caps with their own sustainability departments, but from the German Mittelstand, Italian SMEs, mid-sized companies from across Central and Eastern Europe.They are looking to understand what's going on from a European regulatory point of view, and to better understand the evolving demands of investors regarding sustainability.
Our Sustainable Finance Advisory offer goes from a targeted ESG solution to a comprehensive advisory package.
We can help with the client's ESG finance strategy, providing peer benchmarking of their approach to ESG, investor engagement and mock ESG ratings exercises, including targeted advice of what they can address to deliver an immediate improvement in their ESG rating. Within our team, we have three people who have joined us from ESG rating agencies. It's really important to be able to leverage that external perspective.
Finally, we translate all that into ESG financing instruments, structuring ESG finance frameworks, selecting the right product, managing the Q&A process and preparing them to approach the market with the right ESG investor presentation. It is very much a holistic view of the role of ESG financing.
ESG bond issuance to break the trillion-dollar barrier
EF: Does that suggest a more joined-up approach between debt and equity capital markets, from the issuer's perspective?
AK: This has been the direction of travel for a few years now, dating back to the emergence of the sustainability-linked bond market.That was triggered by companies who were intrigued by the green bond concept but didn't have explicitly green assets. They began to ask about the potential of the market from a strategic sustainability point of view. That's where we realised that we had to decouple the market from a purely product-based approach to become more product-agnostic.
We are seeing the growing relevance of ESG in the equity business, with a lot of potential beyond the classic 'green IPO' from pure-play environmentally orientated companies. Increasingly, part of the IPO offering involves the issuer setting out its ESG narrative: it is no longer just about outlining a strategy and a multi-year business plan, but about presenting the company's sustainability concept. This topic has become of societal relevance – if companies don't address it, they will need to explain why.
EF: What about on the investor side? How are they engaging with the market?
AK: Overall, the sustainable finance community is becoming more interlinked. To provide an example, we are currently preparing the green bond framework for a client. The client is being engaged by ESG investors who are offering their experience and views to act as a sort of sparring partner, providing input on the appropriate use of proceeds and the sort of activities they would be interested in financing.This is great.This will enable our client to prepare a framework that is, to a large extent, already mirrored against the expectations of investors who have a very clear idea of what such a framework should include.
EF: What would you point to in terms of landmark transactions you were involved in 2021?
AK: One transaction that particularly stands out was the sustainability-linked bond that we helped [Italian oil & gas company] ENI to issue last year, which was the first such bond from the oil and gas sector. As well as supporting the issuance, we helped the company to set up its sustainability- linked financing framework.
What ENI is doing is linking its financial strategy to its sustainability strategy. Together with the client, we defined the relevant KPIs to include in the framework and from which it can choose when it issues a bond. The ESG KPIs used for the inaugural bond addressed two main areas: the company's upstream net carbon footprint, covering Scopes 1 and 2; and the company's installed renewable energy capacity. They were very clear targets, which ENI did a terrific job in explaining to the market.
The transaction was extremely successful. We ended up with a highly over-subscribed book for a €1 billion transaction. We interpreted this as a very strong signal of acceptance from the market. So, in many aspects, it was really a landmark deal.
EF: UniCredit also came to the market with its own green bond last year. How did that process go?
AK: Our goal was to set up a holistic Sustainability Bond Framework which allows us to issue in both green and social formats across all Group entities. We have several different issuing entities within UniCredit, including the main Italian, German and Austrian units, as well as local issuers across our other European banks.
Since establishing the framework, we've already issued four transactions – a green senior secured bond and a social bond out of Italy; a green Pfandbrief out of Germany; and another green covered bond out of Hungary. The framework, which is in line with the 2021 version of the Green and Social Bond Principles and the Sustainability Bond Guidelines of ICMA, is being used extensively across the Group, showing our strong commitment to sustainability and the strategic importance of ESG for our business. EF:Where do you see opportunities for growth?
AK: Transition is the key topic. The market is well advanced in picking the low-hanging fruit – the easy-to-define use- of-proceeds areas such as renewable energy and energy efficiency. Now, it will be all about what carbon-intensive industries can offer. The big question will be their ability to meet the standards which are currently being discussed.
EF: Is the EU Taxonomy process helping or hindering there?
AK: The potential breakup of Europe when it comes to the treatment of nuclear and natural gas within the Taxonomy is concerning. We may have individual European countries saying that, if the Taxonomy is passed as it is with nuclear and natural gas, then they will define their own taxonomies. Similarly, there is the possibility that the EU Green Bond Standard, which makes reference to the Taxonomy, could exclude investments in nuclear and gas as currently discussed by lawmakers in the European Parliament. Our view is, we must take further steps towards the creation of a harmonised market.
It is important to have coherence among different pieces of ESG regulation in the EU, and at least some level of international harmonisation
In this context, it is important to have coherence among different pieces of ESG regulation in the EU, and at least some level of international harmonisation.
As to the transition, we are also closely following the work of the European Commission's experts on extending the Taxonomy beyond green. A classification system which would take into account different levels of performance, a sort of 'traffic light system', could bring further clarity to the market. At the same time, there is also a risk that the Taxonomy will become overly complex or that, by creating a list of 'significantly harmful activities', it could steer capital away from transition efforts.
EF: UniCredit has made a commitment to achieve ESG volumes of €150 billion over the next three years. How does the bank plan to achieve that, and what role will Sustainable Finance Advisory play?
AK: Sustainability is a key lever of the new UniCredit Unlocked strategic plan the bank presented in December 2021, with several ambitious ESG targets for 2022-2024. This includes a target of €150 billion in new cumulative ESG volumes across environmental lending, ESG investment products, sustainable bonds and social lending.
We have established an ESG advisory model for corporates and individuals, are financing innovation for environmental transition and we are partnering with key players to enrich and improve ESG offerings across sectors.
Sustainable Finance Advisory supports clients in their transition to a more sustainable economy.We constantly strive to increase customer engagement on ESG-related topics and facilitate clients' access to Europe's sustainable financing markets, combining sustainability expertise with capital markets capabilities. This is complemented by an enhanced and comprehensive ESG advisory approach supporting our clients on their ESG journey.
Antonio Keglevich is Global Head of Sustainable Finance Advisory at UniCredit, based in Munich.
For more information, see: www.unicreditgroup.eu/en
