Investors are increasingly looking 'beyond the balance sheet' of fund investments and the asset classes acquired by funds. The various approaches to sustainable investing has generally resulted in greater reporting and transparency requirements around non-traditional financial metrics linked to ESG, including requirements set out in fund constitutional documents and side letters. Fund finance for ESG funds has recently become more sought-after and the finance industry has adapted bytailoring the structuring of such financing to meet investor and industry pressures including to protect against "green washing" concerns. For example financial institutions may require borrowers to act in accordance with certain ESG frameworks and include specific provisions in fund finance documents to require additional reporting and compliance obligations linked ot ESG metrics.
With the momentum around ESG and the rise in investor demand for sustainable and ESG funds, we expect an increased focus on ESG within fund finance going forward.
Real estate finance
Statistics from the European Commission suggest that buildings are responsible for 40% of the energy consumption and 35% of the CO2 emissions in the EU. Decarbonisation in the real estate sector is going to be a critical focus point for landlords, owners and real estate investors and this will have an impact on design, retrofitting, new technologies and materials, all of which will require a funding commitment and banks are now providing designated green loans to assist.
Green loans in the real estate sector can take many forms, from acquisition finance of green buildings, refinancing of existing indebtedness in respect of green buildings and/or the development/re-development of non-green projects to make them into green assets. The main requirement underpinning these green loans is to utilise the loan proceeds towards green projects and purposes.
There is a perceived risk from 'greenwashing' projects and borrower's ESG commitments, and so it is important that borrowers put green finance frameworks together to track their green utilisation of loan proceeds. In addition, from a legal perspective, the loan documention will come under increasing scrutiny by all parties to make sure these requirements are adequately documented.
One of the fastest growing sectors in the global financial industry is the Islamic finance sector. It has been reported that global Islamic finance assets increased to USD $2.88 trillion in 2019 and are forecast to reach USD $3.5 trillion by 2024. The Islamic finance community is looking at focusing on green finance due to its inherent strength in ethical finance that compliments Sharia law principles. A private sector led initiative 'The Islamic Finance and the UN Sustainable Development Goals Taskforce' is taking a leading role within the global Islamic finance industry to highlight the green finance opportunity within this sector.
Luxembourg Green Stock Exchange (LGX)
Luxembourg was the first jurisdiction in the world to launch a fully dedicated green stock market in September 2016, the LGX. LGX is a platform used by issuers to market green, social and sustainable securities to investors. LGX lists bonds, sustainable and social instruments, funds, indexes and aims to extent to all sustainable financial instruments. Entry on the LGX is restricted to issuers who must comply with mandatory disclosure requirements at issuance as well as ongoing reporting on the listed securities. Investors, which have free and unrestricted access to the documentation relating to a product as well as the use of proceeds of such product, can benefit from increased transparency and are better equipped to make informed decisions on their investments. In August 2020, LGX displayed 135 issuers across 32 countries, in 32 currencies, totalling 365 billion USD.
The International Stock Exchange (TISE)
TISE has a market segment, TISE GREEN, to enable those seeking investment into environmentally beneficial initiatives to highlight their green credentials while, at the same time, providing easier access for investors who are looking to invest in securities which have been verified as meeting globally recognised standards in green finance.
Ogier's experience and service offering goes beyond the banking and finance team. We have our own dedicated ESG and Impact Services team, which can offer a wealth of knowledge and advice to assist clients in shaping their ESG strategy and operationalise this into investment, lending and project finance approaches.
Ogier Global ESG & Impact offer a range of services to support you to adopt responsible banking practices.
- Develop your banks ESG strategy and policies
- Train your talent to become ESG proficient
- Translate ESG and Impact into your product universe and risk management processes
- Conduct measurement and reporting of your ESG performance to align with UN Principles for Responsible Banking, TCFD and more
More information about the ESG linked deals Ogier has been involved with can be found through the "Publications" link below.