Deciphering Opportunities and Drivers of ESG Integration

On 7th February 2024, Natixis CIB’s Green & Sustainable Hub hosted an exclusive lunch to discuss the opportunities and drivers of sustainable finance regulation in UK and EU jurisdictions and ESG integration in alternative assets.

The event featured two panel discussions, with speakers from across the industry convening to discuss regulatory interoperability issues and the role of disclosures and data in satisfying the growing demands in this space. With the UK regulation now differing from the EU, ESG developments in regulation and reporting take on a specific dimension, which is not without consequences for the private debt markets.

To kickstart the event, Simon Eedle, CEO, Natixis CIB UK and Thomas Girard, Global Head, Natixis Green & Sustainable Syndicate, welcomed guests, provided a comprehensive overview of the current climate.

“As governments, institutions and companies continue to gear up their decarbonisation efforts, climate investing has gained significant momentum in recent years”, Simon commented. “Capital invested in wind, solar, electric vehicles, nuclear, hydrogen efficiency and supporting the grid topped US$1 trillion in 2022.”

Alongside this, regulation has climbed up the agenda, forcing market participants to take ESG reporting requirements more seriously than ever before.

Simon Eedle, CEO, Natixis CIB UK

However, there are currently a multitude of sustainable finance regulations and frameworks in operation.

“Differences in scope and interpretation pose interoperability problems – particularly for cross-border businesses and projects”, Thomas explained. What’s more, the quality, reliability, and verification of data being collected to meet regulatory requirements is often inconsistent, which can further compound issues.

And the challenge is not just a matter of mandatory requirements, added Thomas, because above all “investors need data to assess their investments against their sustainable investment mandate, to support their investment analysis where ESG factors are seen to be relevant to the investment case or investment outcome sought, and to meet specific reporting obligations requested by their clients”.

To better shed light on the current regulatory landscape, the event’s first panel discussion focused on providing a comparative overview of the UK and EU sustainable finance regulatory frameworks.

Natixis CIB’s Green & Sustainable Hub’s Laurene Chenevat, Sustainable Finance Policy and Regulation Leader, was joined by Ingrid Holmes, Executive Director, Green Finance Institute; Anoushka Babar, Head of Sustainable Investment Index Policy, FTSE Russell at London Stock Exchange Group; and Salma Moolji, European ESG Lead at Ares Management Corporation.

Both the EU and UK have introduced regulatory frameworks aimed at encouraging the financial sector to  support the transition to a sustainable economy. Catalysing investment in sustainable assets is central to this – particularly infrastructure that can support the journey to net-zero. However, integrating complex sustainability issues into the financial sector poses considerable challenges, and the two diverge in their approach when it comes to developing rules.

While the EU’s Sustainable Finance Disclosure Regulation (SFDR) has taken a more reporting-based approach – asking financial institutions to disclose how they are integrating climate and wider environmental, social and governance (ESG) risks into the investment process – the UK’s Sustainability Disclosure Requirements (SDR) favour a principles-led approach. This could go as far as requiring financial institutions to develop transition plans that demonstrate how they are considering and contributing to the transition.

In addition, the UK has chosen to implement a labelling system for sustainable investments, while the EU requires asset managers to designate their funds as either article 6, 8 or 9, according to their level of sustainability ambition, including how they integrate sustainability risks and “principal adverse impacts” (PAIs) in their processes. That said, these articles have been difficult to implement given their vague definitions. In practice, they are also often misused as a labelling system. Given these difficulties, the panel highlighted that the EU is considering revamping these classifications, either by building on the existing articles or developing a new labelling system similar to the UK model.

For the panel, it is clear that the UK has benefitted by learning from the EU, which is further along its regulatory journey. In turn, the UK’s SDR  offers a more holistic viewpoint that is easier to implement. Yet despite their varied approaches, both UK and EU regulators face similar issues when it comes to wider implementation. “Regulators need to figure out how to increase sustainable investments while ensuring it isn’t becoming a major catalyser for greenwashing” explained Laurene.

Indeed, growing scrutiny of products such as sustainability-linked loans (SLLs) demonstrates that there is a growing concern about greenwashing risk and the need to ensure market integrity. Adhering to labels such as the Loan Market Association’s (LMA) Sustainability-Linked Loan Principles (SLLP) can help, but the increasing range of standards and labels, combined with unclear definitions and inconsistent performance management means it is currently still difficult to achieve widespread, meaningful adoption.

As both the UK and the EU continue to refine their own regulations, interoperability concerns also present a growing threat. Where UK sustainability reporting is based on the International Sustainability Standards Board (ISSB), the EU adheres to its Corporate Sustainability Reporting Directive (CSRD), which diverge when it comes to reporting and data requirements. For the panel, ensuring flexibility to allow for adjustments to be made while ensuring strong ambitions are maintained will be key to overcoming these issues.

Building on the topic of data and disclosure, the event’s second panel addressed the topic of ESG data availability and application. William Sharpe, Green & Sustainable Loan Syndicate Specialist at Natixis CIB’s Green & Sustainable Hub sat down with Gemma Lawrence-Pardew, Head of Sustainability and Director, Legal, Loan Market Association; Amanda Gray, Principal, ESG Credit, Apollo Global Management; and Edward Vaughan Dixon, Head of Responsible Investment, Aviva Investors.

Data is key to sustainable investing, however, the current patchwork of regulations and requests for information from investors presents a challenge, with firms becoming increasingly overwhelmed by complex  and lengthy questionnaires and a lack of standardisation.  At the same time, investors often find that available ESG data is inconsistent or incomplete.  Despite the ongoing issues, the panel highlighted the progress that has been made, suggesting that the ”voluntary” approach to disclosure often facilitated borrower compliance compared to a more heavy handed mandatory approach.

The panel discussed several initiatives aimed at streamlining the reporting process. Notably, the ESG Integrated Disclosure Project (ESG IDP), supported by Natixis CIB, – which was designed to harmonise ESG disclosures across the private and broadly syndicated credit markets through a standardised, universal reporting template – was highlighted as an important development. In addition to saving time on data collection and replication, the initiative is proving particularly beneficial to smaller businesses that do not have the same dedicated resources as larger, listed companies when it comes to tracking and locating data, thanks to emerging partnerships with private suppliers of data able to provide relevant industry benchmarks.

In addition, the panel addressed the heavy focus on data availability and whether the lack of complete data sets is holding the market back. In reality, there are multiple other factors that can be considered to facilitate action, including benchmarking or simply making investment decisions that will lead to real world change. Ultimately, having the right outlook and a strong commitment to supporting the sustainability journey is more important than striving for perfect numbers.

On the topic of data availability, the conversation turned to the role of SLLs and their use as a data collection tool. While it was acknowledged that SLLs encourage engagement to some degree, the panel noted that the tool was in fact better suited to companies that have already completed their data collection. This is because these businesses have a stronger understanding of what is material to them, enabling them to identify clear areas of focus and create more relevant key performance indicators (KPIs). 

With regards to application, William noted, “SLLs can be used pretty broadly in the market. They do not just serve a single type of issuer, but can be adapted to the growth of the company and how far along they are in their sustainability journey”. That said, the success of the tool varies between markets and asset classes, with the panel highlighting that there is still work to be done to incentivise wider uptake.  A clear distinction was noted between the use of SLLs in the broadly syndicated loan market compared to private credit, with the latter having the advantages of confidentiality in addition to increased flexibility in terms of incentives available to issuers for achieving sustainability performance targets (SPTs).

To conclude the event, Orith Azoulay, Global Head of Natixis CIB Green and Sustainable Hub, offered some closing thoughts. Orith echoed the panel’s view on the industry’s focus on data perfection, emphasising that “there are many decisions we can make with already available data which can make a huge difference in terms of the ESG journey we are trying to support.” She also praised the strength of the EU’s binding approach to ESG reporting legislation, highlighting that, while it will take several years for corporates to fully align operations with its taxonomy, it will incite meaningful change. 

Looking ahead, the industry will need to reconcile long-term ESG analysis and planning with a short-term willingness to take action. While the collection of ever-improving ESG data and the incorporation of effective legislation is crucial, there must also be a collective shift in mindset to bring about long-lasting change.