Global debt market lacks transparency with 90% of unknown ESG impact: WWF

Sustainability-linked loans can be a powerful tool in ESG transition. But portion is still minor nowadays.
Global debt market lacks transparency with 90% of unknown ESG impact: WWF

All issuers of debt around the world should disclose the environmental, social and governance (ESG) risks, as the ESG impact of 90% of debt in the market is still unidentified, a report by the World Wide Fund for Nature (WWF) has found.

Global private and public debt issuance climbed to $281 trillion by the end of 2020 and proved to be the largest source of financing globally. This was almost three times the value of the $95 trillion global equities market, the report published on Sept 30 noted.

“Diverting just a small part of that capital flow from unsustainable sectors to green and sustainable activities would have a massive impact on the planet,” the WWF said.  

In the past five years, green and labelled bonds have accounted for up to 20% of the total bond market in some countries from zero. Labelled bond instruments improve market transparency by providing additional information on the impact on sustainability of the underlying projects.

Globally, green bonds and labelled bonds are expected to represent over 10% of bond issuances in 2021, the report estimated.

Source: WWF (Click for full view)

“That growth must broaden and accelerate as the remaining 90% of the instruments traded on debt capital markets today provide very little, if any, information on their environmental impacts,” it said.

The use-of-proceeds approach for green labelling has created new levels of transparency in debt capital market transactions. This must be expanded to ensure that all debt capital market instruments, not only those labelled as green, to provide information on ESG impacts, the report added.

Asset owners, including the world’s largest banks and insurers, have reiterated bold net zero commitments to be delivered. However, the pledges do not yet cover their corporate and investment banking arms, who play a pivotal role in the origination and distribution of capital. This must change, the report said, so these deal makers can make the rapid shift to green, it said.

Source: WWF (Click for full view) 
*Note: 'Green' data indicates debt arranged by bank on behalf of corporate and government issuers for climate or environmental projects. These projects had to be deemed eligible for green bonds by lenders and investors.

Jochen Krimphoff, WWF’s initiative lead for sustainable bond markets, told AsianInvestor that global asset owners, central banks, regulators and institutional investors must work together on international standards that define what is ESG-compliant, such as common taxonomy, to facilitate disclosure and transparency in debt markets.

“From an Asian investor perspective, it doesn’t make sense to have different definitions of what is green, one for Europe, one for Asia, etc. That’s really creating unnecessary friction in the capital market,” Krimphoff said.

Jochen Krimphoff,

“I think both regulators and investors realise that it’s critical for global leaders to agree on a common set of definitions, including taking into account what’s done in Europe for Asian investors [to learn from], and the other way around,” he said, adding that he believes the G20 forum and the International Platform on Sustainable Finance, co-chaired by China and Europe, could serve as good platforms to facilitate work on definitions and common grounds across the border.

“These taxonomies should be based on the same principles, be science-based, and use the same metrics, even if the specific thresholds can vary from region to region,” he said.


Krimphoff noted the rapid growth of sustainability-linked loans and bonds in the last two years is a good example of growing transparency in the debt market, despite their relatively low volume.

In these structures, issuers commit to targets for environmental or sustainability indicators. Achieving or failing to achieve them is linked to the bond coupon payment or the loan interest rates.

For instance, Japan’s largest life insurer, the $675 billion Nippon Life Insurance, has just made a 3.5 billion yen ($31.5 million) sustainability-linked loan agreement with Tokyo Century Corporation as a co-arranger, to finance the Japanese lease financing provider in cutting its carbon emission.

The loan’s interest rate may change depending on whether Tokyo Century achieves relevant carbon reduction targets in its solar power and other projects listed in the loan terms, Nippon Life announced on Sept 24.

Sustainability-linked bond issuance is expected to grow sixfold from $10 billion in 2020 to $60 billion new in 2021, the WWF report noted.

Source: WWF (Click for full view)

These transition commitments by issuers must have relevant indicators and ambitious short and medium-term targets. A nature-related Key Performance Indicator (KPI) developed under the Science Based Targets for Nature (SBT-N) framework should become a mandatory feature of every Sustainability-Linked Bond instrument as soon as these become available in 2022 the earliest, the WWF’s report said.  

“Science-based targets for climate and nature are needed to strengthen the credibility of these instruments and the robustness of the underlying key-performance metrics,” Krimphoff said.

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