There is a high degree of grumbling in the capital markets about how long ESG regulation takes to pass, but the market has shown itself incapable of the sort of self-government that would make the rules unnecessary.
At this week’s Global Borrowers & Bond Investors Forum in London, multiple panellists, from trade bodies, banks and think thanks, said that the laborious way that regulation was implemented in environmental, social and governance finance was hindering the market.
They are right. Even with the European Union pumping out regulation at pace since its Taxonomy of Sustainable Activities was introduced in July 2020, there are still major inconsistencies in regulation, in some cases meaning that following one rule can exclude a borrower from being able to satisfy another.
This is, at best, sub-optimal for a smoothly running market — something that regulation strives to achieve.
However, the market is unwilling and unable to moderate itself properly to make official regulation unnecessary.
For use of proceeds bonds, the market was mostly very good at maintaining standards, with guidelines from bodies such as the International Capital Market Association steering the way.
But these bonds are straightforward. Either the money is going towards a green project or it isn’t. It’s just up to the market to decide what constitutes a green project, for which it has the Taxonomy.
For more nuanced structures, the market has proved that it is willing to bend definitions so much that they become almost meaningless. In sustainability-linked bonds, investors have long complained that key performance indicators are not ambitious enough, and yet the only tangible effect on SLBs in the primary market is that they do not tend to offer the issuer a greenium.
Of the billions of euros of SLBs sold, only a handful of companies have ever had to pay a coupon step-up for missing targets. SLB poster company Enel has done this admirably — it possibly could have got out of paying because it was not the company’s fault it missed targets. But its payment of €25m a year in extra coupons serves to highlight how unambitious other companies have been.
The point behind SLBs isn’t for some clever banker or treasurer to shave a few basis points off a new bond, it’s to slow down the pace of climate change.
Too much regulation is bad, but the market blew its chance to make a case that it wasn’t necessary.