![]() Market participants have likened what it might take to achieve regulatory maturity to the length of time taken for international accounting standards to be agreed and embedded: 70 years! Set in that context, the noble ambition of regulators can be seen with some empathy and some inconsistency of overlap and lack of perfect synchronicity can be forgiven awhile. Already, the SFDR is subject to request for consultation and adaptation so we must get used to constant evolution. Much of this regulation is evolutionary and a host of earnest – but not always perfectly co-ordinated – processes are in train in Europe, the UK and around the world. While the advent of yet another regulatory measure has its critics, at heart it is an attempt to bolster corporate conduct, the damaging effects of which are strewn across the media near daily. The Corporate Sustainability Due Diligence Directive, or CS3D, will require disclosure on climate, supply chain and protection of human rights 1 and will encompass many of the companies (500+ employees and net €150 million+ turnover worldwide) in the leveraged finance market when it is fully in force. The playing-field will be further levelled between those who already provide extensive voluntary disclosure and those who do not. This gives shape to an investor’s analysis and a company’s Capex can be assessed in context because it will be reported on in a consistent way, thanks to requirements of the taxonomy. Regulation like the UK’s Green Taxonomy make clear precisely which economic activities enable a path to net zero. What does it mean when a company says that it is targeting net zero? Increasingly, loan and CLO investors are getting themselves educated and will no longer confuse vague assertions with science-based ambition, rooted in fact. ![]() ![]() The trade bodies have issued helpful guidance here on principles and best practice. All involve the linkage of financing cost to the achievement of pre-defined ESG targets but those targets – whether or not embedded in a financing instrument – need to be relevant, stretching and monitored to count for something in any assessment of sustainable investment.Īs a side note, SLLs are the labelled instruments of choice for borrowers and issuers in the European leveraged finance markets as opposed to a “green” or “social” instrument that demands a single purpose for the use of its proceeds versus the permissible “general corporate purposes” of the SLL/SLB). SLLs and SLBs are also different to loans with an embedded ESG margin-ratchet, having more rigour if the market guidelines have been fully observed. It is important also to note that SFDR is a disclosure regime only – the onus is on the investor to assess each investment and disclose its underlying assumptions when deeming it sustainable.Ī sustainable investment is not necessarily synonymous with a sustainability-linked loan (SLL) or sustainability-linked bond (SLB) either. Consideration of relevant and material principal adverse impacts plays a part in confirming that a sustainable investment has been roundly assessed. Much precision of terminology, careful categorisation of activities and proofs via consistent measurement have gone into rendering of a robust definition but it is likely that no two approaches are identical even if they have both been subject to considerable scrutiny.įurthermore, for all market participants, there is scope for confusion: environmentally-sustainable activities may be described in the EU Taxonomy, for example, but a sustainable investment does not necessarily have to be aligned with those. Grappling with precisely what activities and minimum thresholds must be cleared for all three has been a complicated affair for investment managers, including in European leveraged finance. That said, in regulatory speak, a sustainable investment consists of three aspects: ![]() ![]() The onus is on the investor to assess each investment and to disclose its underlying assumptions when ascribing the adjective. They will have strong defences against malpractice too, including whistleblowing. They will not be companies active in harmful sectors nor reckless with their waste or water nor inattentive to the needs of their workforces around the world. Sustainable investments may be those made in companies that are Paris-aligned or with diverse boards and management teams. ‘Sustainable’ may mean revenue derived from environmental solutions or activities that contribute to the circular economy or better health, for example. Precisely defining “sustainable” has been a topic of much debate, including across European leveraged finance but, broadly speaking, it is an economic activity that contributes to an environmental or social objective. ![]()
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