The European Commission in its Green Deal has estimated that achieving the current 2030 climate and energy targets will require an additional investment of €260bn each year. As outlined in the European Commission's Sustainable Europe Investment Plan, public sector funding through tax reforms, EU and national budgets, the Invest EU Fund, the Just Transition Mechanism, Innovation and Modernisation Funds and the European Investment Bank as Europe's Climate Bank, will all play key roles. However, it is clear that a significant amount of the funding gap will need to be provided by private finance including from the debt capital markets and private funding markets.
In order to attract private finance, there are substantial initiatives at a global, EU and domestic level designed to connect finance with climate action and the sustainability agenda. These sustainable finance initiatives aim to create an enabling framework to channel financial investments into sustainable areas and provide long-term signals to direct financial and capital flows to green investment.
The United Nations (UN) Environment Programme Finance Initiative (UNEP FI) is a partnership between the UN Environment Programme, global banks, insurers, investors and other institutions who have committed to sustainable finance and investment. Through frameworks such as the principles for responsible banking, sustainable insurance and responsible investment, the signatories have committed to setting standards designed to ensure private finance fulfils its role in realising the UN's 2030 agenda for sustainable development and the Paris agreement on climate change.
At an EU level, the European Commission has already taken a number of concrete actions stemming from its March 2018 Sustainable Finance Action Plan. These actions aim to strengthen the foundations and frameworks for sustainable investment by enabling investors to be informed about, assess and measure the sustainability of their investments. The framework includes:
- creation of a classification system for environmentally sustainable activities (Taxonomy Regulation (Regulation (EU) 2020/852))
- increasing disclosure requirements on climate and environmental data (for example the 'Sustainable Finance Disclosure Regulation' - Regulation (EU) 2019/2088)
- harmonisation of low-carbon benchmarks (such as the EU Climate Transition Benchmarks Regulation (Regulation (EU) 2019/2089 measurement and EU Paris-aligned Benchmark).
These are all foundations to promote and accommodate increasing investor demand for internationally recognised sustainable investments with measurable and reportable impact. The European Banking Authority is also updating its guidelines on internal governance in the context of ESG considerations. The EU Commission on 6 July 2021 published a further Communication 'Strategy for financing the transition to a sustainable economy'. This Communication is a build on the 2018 action plan and its building blocks of the EU Taxonomy, mandatory disclosures for financial and non-financial companies, and investment tools such as benchmarks, standards and labels. The Communication proposes actions in the areas of transition finance, inclusiveness, resilience and global ambition.
The Irish government has identified sustainable finance as one of its priorities within its "Ireland for Finance 2025" strategic plan. The importance of a green recovery to the global pandemic has been emphasized in recent months and it is clear that sustainable finance will play a key role in that recovery and more broadly in the move to a more green economy in Ireland. In the finance markets there has been rapidly increasing activity both in the debt capital markets and the private lending markets.
The development of the EU Green Bond Standard by the EU technical expert group on sustainable finance is a build on the International Capital Market Association (ICMA) green bond principles which, according to ICMA, have been used as the framework for the vast majority of green bond issuances. The EU Green Bond Standard has four critical elements: alignment with EU taxonomy, publication of a green bond framework, mandatory reporting and mandatory external
Following the European Green Deal Investment Plan of 14 January 2020, the EU Commission on 6 July 2021 proposed its European Green Bond Standard and Regulation on European Green Bonds. This Regulation focusses on four key requirements:
- taxonomy alignment
- external compliance review
- supervision by the European Securities Markets Authority
In the debt finance sector, we had recent experience of corporate loans with contractual economic incentives and other sustainability performance targets based on the Loan Market Association's Sustainability Linked Loan Principles. In our view this will become an increasing feature of bilateral/syndicated loan facilities in the short term, in particular as more companies focus on making environmental, social and governance objectives a core feature of their business strategy and seek to align their financing to these strategic objectives. The "first movers" in Ireland and the UK in this space have been domestic and international corporates who have an embedded sustainability strategy for their business and are now aligning their financing arrangements with their overall sustainability strategy.
AIB Group on its €1bn inaugural green bond issuance
The green bond was the first to be issued by an Irish bank. It was issued as Tier 2 capital, making AIB only the second European bank to issue Tier 2 capital in the form of green bonds. The issuance was in compliance with ICMA's Green Bond Framework.
IPUT on its first real estate green financing
We advised IPUT plc on a facility with Wells Fargo which included one of the first green RCFs in the Irish market. The €200m green tranche will be used by IPUT to finance projects which meet sustainability criteria based on the LMA's Green Loan Principles.