Sarah Thompson, Moses Choi and Stefano Vitali from RBC Capital Markets' Sustainable Finance Group map out their ESG themes for 2023
January 2023 marks four years since RBC Capital Markets launched its Sustainable Finance Group. As the team reflects on the tremendous evolution across the sustainable finance market during this time, they review the key themes that could define progress in the year ahead.
The evolution of the sustainability disclosure landscape is a key theme to watch in 2023, with a global baseline for disclosures anticipated to be finalised by the International Sustainability Standards Board (ISSB) towards the end of Q2. This should bring a renewed focus to the connection between sustainability and financial value creation while helping to address greenwashing concerns by increasing the transparency and reliability of sustainability disclosures.
Additionally, the US Securities and Exchange Commission (SEC) proposal – unveiled in March 2022, to enhance and standardise climate-related disclosures for investors – would require reporting companies to include certain climate-related disclosures in their registration statements and periodic reports. The proposal is also anticipated to help accelerate the breadth of companies reporting.
"The SEC received more than 15,000 comments on the proposal. While there is broad agreement that uniform rules could benefit businesses (reducing costs of compliance) and investors alike, Scope 3 emissions disclosure remains a contentious issue," says Moses Choi, director, sustainable finance at RBC Capital Markets.
For many companies, the proposed disclosures are in line with what they currently provide under the Task Force on Climate-related Financial Disclosures (TCFD) framework and Greenhouse Gas Protocol. The key change will be a shift towards more standardisation, consistency, and comparability.
In Europe, investors and issuers are also preparing for an increased set of disclosure requirements coming from the Sustainable Finance Disclosure Regulation (SFDR) Level 2 standards and the Corporate Sustainability Reporting Directive (CSRD), which expands the scope of nonfinancial reporting requirements for financial institutions and companies.
Recent guidance from industry bodies – including the International Capital Market Association (ICMA) KPI registry for sustainability-linked bonds (SLBs), new definitions for green securitisation, and new resources for climate transition finance – should also play a critical role in helping to bolster disclosure and mitigate greenwashing concerns.
There are also challenges in the market around the ambition and materiality of key performance indicators (KPIs) in bonds and loans still to be solved.
"Investor demand for standardised and comparable KPIs is driving the growth of third-party players such as SBTi [Science Based Targets initiative] and ESG consultancies that support companies in developing their science-based targets," says Stefano Vitali, director, sustainable finance at RBC Capital Markets.
"Further to this, as limited and/or reasonable assurance is a requirement of the Sustainability-Linked Bond Principles (SLBPs), demand for these services will see further growth going forward."
Another major theme is the idea of "a great reset" for ESG integration and sustainable finance.
In 2022, investor, regulatory, and public scrutiny of corporate sustainability commitments and strategies translated into enhanced attention to quality and integrity in the sustainable finance market. An evolving disclosure landscape and a renewed focus on financial materiality and value creation are expected to draw further attention to these issues in the year ahead.
"As market participants become more sophisticated and regulatory frameworks become more stringent in terms of what qualifies as a 'sustainable investment', this heightened awareness will help alleviate greenwashing concerns and drive further innovation in the market," says Sarah Thompson, managing director, sustainable finance at RBC Capital Markets.
In Europe, the mass reclassification of SFDR Article 8 and 9 funds experienced at the end of 2022 is a reflection of increasingly stringent disclosure requirements, says Vitali.
"Furthermore, it will be interesting to see how the ECB's experimental indicators on sustainability will play out in the market and how they will be incorporated in their policies going forward, especially as the demand from market participants for more data and disclosures is only expected to grow as they strive to better assess risk," he adds.
The third theme for the year ahead centres on transition finance. Transitioning to a net-zero future requires significant investment, much of it in sectors of the economy that are high-emitting and hard-to-abate.
"To achieve net-zero emissions by 2050, our society needs to reduce emissions in areas such as power generation, transportation and agriculture – all of which provide essential products and services to society today and for the foreseeable future," says Thompson. "Our RBC Economics group estimates that CAD$2 trillion ($1.5 trillion) in investments is required in Canada alone."
Thompson sees the emergence of large, dedicated pools of private capital focused on energy transition and green use-of-proceeds instruments to finance the life extension or refurbishment of nuclear power generation facilities in Canada.
"It is important for us to support our clients in these industries on their journey towards a net-zero economy. That's why RBC's approach includes solutions that serve to decarbonise emissions-intensive activities across all sectors," she adds.
"We support ongoing work to further develop standards and guidance on transition finance including the emergence of transition finance taxonomies that reflect regional economic variations, decarbonisation pathways, and resource availability."
RBC is actively contributing to some of these efforts including through participation in bodies such as Canada's Sustainable Finance Action Council (SFAC) and the ICMA Climate Transition Finance Working Group.
In May 2021, the Government of Canada launched the SFAC to support the growth of the sustainable finance market in the country, with a mandate to make recommendations on critical market infrastructure including common standards for green and transition-related investments across all sectors of the economy.
An important goal of this taxonomy is to accelerate the deployment of capital in support of achieving Canada's climate objectives. It is expected that the Government of Canada will publicly release a set of recommendations and commence work in 2023.
In the US, Choi says the Inflation Reduction Act (IRA) will direct nearly $400 billion in federal funding to support the US climate transition goals through a mix of tax incentives, grants, and loan guarantees.
Tax credits, which comprise the largest component of the IRA, will catalyse private investment in clean energy, transportation, and manufacturing. As a result of this, Choi expects there to be more corporate green bond issuance as companies deploy capital to support the energy transition.
"Investor demand for green bonds remains robust," Choi says. "Findings from our Global ESG Credit Investor Survey (see box) indicate that 94% of institutional investors actively invest or are willing to invest in green bonds."
Key takeaways from the RBC Capital Markets 2022 Global ESG Credit Investor Survey
- 145 investors from North America, Europe, and the Asia-Pacific region, covering all key currencies and investing in multiple financial products – from investment grade to high yield, from sovereigns, supranationals and agencies (SSAs) to structured products and loans – took part.
- ESG integration in investment mandates was found to be driven by a push from the bottom and guidance from the top in all geographies. Reputational risks and regulatory requirements also play a role.
- Appetite for ESG labels is still there, with investors showing a willingness to pay premia for ESG labels.
- Global investors display a material preference for green bonds: 65% of respondents indicated that they actively invest in the label, compared to approximately 50% for labels such as social, sustainability, and sustainability-linked.
Climate-tech investments will also be one to watch, he adds: "While 2021 was a high-water mark for climate-tech investments – with US venture capital investment reaching $56 billion – the market continues to be resilient. We estimate that there is more than $30 billion in investable dry-powder for climate-tech start-ups, and we anticipate continued focus on corporate innovation and scaling of emerging decarbonisation technologies."
When addressing energy transition through the lens of a capital markets investor, credible transition strategies are the priority and bond labels play an ancillary role in this.
The RBC Capital Markets 2022 Global ESG Credit Investor Survey revealed some interesting observations around the current state of transition-labelled debt. While 14% of respondents indicated that they actively invest in transition bonds today, 65% indicated that they are either considering or researching the product.
"We believe that investors' relative unfamiliarity with the transition label combined with limited issuance to date presents an opportunity to increase awareness and potentially the growth of transition-themed debt instruments in the future," says Vitali.
In the US, Choi sees the popularity of sustainability-linked debt instruments, particularly in the bank market, as an effective way to articulate a bespoke transition story.
"Sustainability-linked structures provide issuers with the flexibility to integrate not simply environmental KPIs, but also targets related to social themes such as just transition, access to essential services, and diversity and inclusion," he says.
Looking ahead to 2023, the group will continue to ensure RBC Capital Markets supports clients on their journey towards a net-zero economy.
"By providing sustainable financing solutions, RBC intends to help finance the transition to net-zero, strengthen a diverse and inclusive culture, build stronger communities and enable economic inclusion," says Vitali.
Thompson adds: "We believe there is tremendous potential for financial markets to contribute to addressing some of the biggest social and environmental challenges we face – from improving the accessibility of affordable housing and inclusive financial services to mitigating climate change and protecting biodiversity."
Thompson also anticipates continued, long-term growth in the Voluntary Carbon Markets (VCMs) as companies operationalise their net-zero commitments.
"Corporates across all sectors are increasingly looking to VCMs to help offset residual GHG emissions and achieve net-zero commitments. Efforts to scale VCMs continue, with both demand and supply-side integrity initiatives playing an important role in driving increased trust and transparency among market participants," she says.
"We anticipate that the critical role of high-quality carbon credits, as a source of funding for nature-based solutions to support biodiversity and climate mitigation and adaptation objectives, will become increasingly appreciated by market participants, regulators, and the general public alike.
"Much like climate, we see nature and biodiversity as financially material to all sectors of the economy, and as a result, see immense potential for issuers to integrate these considerations into their corporate sustainability strategies and use the sustainable finance market as a lever for advancement," she adds.
For more information about RBC Capital Markets, see: www.rbccm.com/en/insights/esg.page
RBC Capital Markets Sustainable Finance Group's milestones
In February 2021, RBC announced an increased commitment to mobilise CAD$500 billion in sustainable finance by 2025 – one of the largest commitments of its kind made by a Canadian bank – after achieving the initial commitment of CAD$100 billion in sustainable financing in 2020.
In October 2022, RBC published its Sustainable Finance Framework, which provides transparency to the methodology used to measure and report on progress towards the bank's $500 billion sustainable finance commitment. The team has also grown during this time, with coverage now spanning Toronto, New York, San Francisco, London, and Sydney.
In December 2022, the bank published the RBC Sustainable Commercial Paper Framework, which allows RBC to issue commercial paper where the proceeds will be exclusively applied to fund new and/or existing green and social assets.
Companies:RBC Capital Markets