What just happened?
On the 9th of November, Chancellor Rishi Sunak outlined his ambitions for the UK financial services sector. With the funding of the transition to a net zero economy, making ‘the UK at the forefront of green finance’. Notably, he stipulated that the UK will be issuing its first ever Sovereign Green Bond and will become the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD-aligned disclosures) mandatory by 2025.[1]
What does this mean?
Although there are various definitions, green finance can be defined as any structured financial activity that has been created to produce a better environmental outcome.[2] For example, buying an electric car using finance would constitute as green finance.[3] Increasingly, various forms of green finance, including green loans and green bonds, have been utilised internationally due to rising demand from investors.
Bonds are issued by governments and corporations when they want to raise money.[4] Therefore, by the UK issuing its first ever sovereign green bond, the government will be raising money and using the proceeds to finance projects which will produce environmental benefits.[5] This follows countries, such as Poland and France, who have issued sovereign green bonds to fund projects.
What is a green bond? What is a climate bond? And how can investors who want to ensure their portfolio has a positive impact access these fixed income instruments.
The funding may go to green infrastructure projects, such as constructing new buildings with energy efficiency certifications.[6] Similarly, corporations like Unilever have also issued green bonds and are using the proceeds to reduce the environmental footprint of its business activities.[7] Recently predicted by credit rating agency Moody’s, green bond issuance in 2020 could reach $250 billion.[8]
Similarly, green loans (differing from sustainability-linked loans) relate to when loan proceeds are used for green projects, where the core components of the Green Loan Principles must be met.[9] For example, in 2019, HSBC UK launched new green loans to support SMEs and mid-market companies to provide financial assistance for sustainability projects.[10]
What is the impact on the legal sector?
At a basic level, as the issuance of green finance continues to gain traction, the demand for green finance knowledge will increase and lawyers will be called upon to assist with the structuring process of issuances.
However, the uncertainty remains that there is no statutory definition of what a green bond is, which creates concerns over ‘greenwashing’[11] and the effectiveness of such finance in improving the environmental landscape. As it stands, attention should be drawn to the voluntary guidance under the Green Bond Principles[12] when advising clients on what constitutes a green bond. This may be problematic in the short term, as there is no single authoritative body to provide approval of green credentials, and so this must be confirmed by other third parties.[13]
Considering that disclosure requirements will soon be mandatory across the board, such companies should already be considering climate-related risks as part of their current disclosure and reporting obligations. Those that do not monitor this sufficiently, may later expose themselves to regulatory action or civil proceedings.[14] Thus, it is likely that legal expertise will be called upon to help to mitigate these potential risks.
Ultimately, as the legal and regulatory landscape continues to develop, law firms will have to ensure that they are keeping up to date with the impact of environmental, social and governance (ESG) standards on financial markets globally.
Written by Sheelpa Maroo
Assessing Firms:
#PinsentMasons #NortonRoseFulbright #TLT #CliffordChance #DLAPiper #AddleshawGoddard #BurgesSalmon #Withers #Allen&Overy #Linklaters #Bird&Bird #BakerMcKenzie #White&Case #MayerBrown #Eversheds #Dentons #PenningtonsManchesCooper
References:
[1] HM Treasury, ‘Chancellor sets out ambition for future of UK financial services’ (09 November 2020) < https://www.gov.uk/government/news/chancellor-sets-out-ambition-for-future-of-uk-financial-services> Accessed 2nd December 2020
[2] Sean Fleming, ‘What is green finance and why is it important?’ (World Economic Forum, 09 November 2020) < https://www.weforum.org/agenda/2020/11/what-is-green-finance/ > Accessed 2nd December 2020
[3] ‘What is green finance?’ (Energy Saving Trust, 12 November 2020) < https://energysavingtrust.org.uk/what-green-finance/#:~:text=The%20Green%20Deal%20and%20Green,a%20combination%20of%20the%20two> Accessed 2nd December 2020
[4] Vanguard, ‘What is a bond? A way to get income & stability’ < https://investor.vanguard.com/investing/investment/what-is-a-bond > Accessed 2nd December 2020
[5] Ying Yi Tee, ‘UK sovereign green bonds, the investor perspective’ (BMO Global Asset Management, August 2020)< https://www.bmogam.com/gb-en/institutional/news-and-insights/uk-sovereign-green-bonds-the-investor-perspective/#:~:text=Sovereign%20green%20bonds%20are%20debt,transport%20and%20sustainable%20land%20use.> Accessed 1st December 2020
[6] Ying Yi Tee, ‘UK sovereign green bonds, the investor perspective’ (BMO Global Asset Management, August 2020)< https://www.bmogam.com/gb-en/institutional/news-and-insights/uk-sovereign-green-bonds-the-investor-perspective/#:~:text=Sovereign%20green%20bonds%20are%20debt,transport%20and%20sustainable%20land%20use.> Accessed 1st December 2020
[7] LexisNexis, ‘Green bonds’
[8]Mark Segal, ‘Moody’s Raises Forecast for Sustainable Bond Issuance Again, Now Sees $425B in 2020’ (16th November 2020)< https://www.esgtoday.com/moodys-raises-forecast-for-sustainable-bond-issuance-again-now-sees-425b-in-2020/ > Accessed 2nd December 2020
[9] Loan Market Association, ‘Green Loan Principles’ (December 2018) < https://www.lma.eu.com/application/files/9115/4452/5458/741_LM_Green_Loan_Principles_Booklet_V8.pdf> Accessed 1st December 2020
[10] Business Matters, ‘HSBC UK launches new green loans to support SMEs’ (3 July 2019) < https://bmmagazine.co.uk/news/hsbc-uk-launches-new-green-loans-to-support-smes/ > Accessed 2nd December 2020
[11] Will Kenton, ’Greenwashing’ (Investopedia, 30th January 2020) < https://www.investopedia.com/terms/g/greenwashing.asp> Accessed on 5th December 2020
[12] John Chater, ‘The Green Finance Revolution? A Short Guide to Traditional Financing, Capital Markets and the Green Loan Principles’ (Penningtons Manches Cooper, 24th August 2020) < https://www.penningtonslaw.com/news-publications/latest-news/2020/the-green-finance-revolution-a-short-guide-to-traditional-financing-capital-markets-and-the-green-loan-principles> Accessed 2nd December 2020
[13] Lexis Nexis, ‘Green Bonds’ <https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391290/5G1Y-K281-F185-S3MD-00000-00?utm_source=psl_da_mkt&utm_medium=referral&utm_campaign=green-bonds > Accessed 2nd December 2020
[14] Eversheds Sutherland, ‘Proposals to enhance climate-related disclosures by listed companies’ (24th June 2020) < https://www.eversheds-sutherland.com/global/en/what/articles/index.page?ArticleID=en/Financial-services-and-dispute-investigation/Proposals_to_enhance_climate_related_disclosures_by_listed_companies> Accessed 2nd December 2020
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.