CIBC drives the sustainability agenda

Welcome to the next edition of the CIBC Capital Markets Sustainability newsletter.

At CIBC, we are committed to making sustainability a reality for our clients and the communities we serve. We have built a market-leading Renewables franchise to provide our clients with expert advice, capital and access to capital markets in this important sector. Whether through greening your balance sheet or providing sustainability advisory services, our objective is to help our clients become global leaders in environmental stewardship and sustainability. Our bank is committed to mobilizing $150 billion in environmental and sustainable finance activities by 2027 to support clients in transitioning to a lower carbon economy, and we’re well on our way to achieving this target.

The Sustainability-linked Loan Principles (SLLP) – update published

The Loan Syndications and Trading Association (LSTA), the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) have together published a set of guidelines, “The Sustainability-linked Loan  Principles (2019)”, that set out the core components of a Sustainability-linked Loan (SLL). These Principles which were released in 2019 have been updated as of May 2021 to provide more scrutiny and robustness with an objective to promote the development, and preserve the integrity of sustainability-linked loans by providing guidelines which capture the fundamental characteristics of these loans. Major highlights in the May 2021 edition of the SLLP include:

• Relevant KPIs: Clarification that the selection of the KPIs not only need to be relevant, but also of high strategic significance to the borrower’s current and/or future operations
• Target Setting Logic: Target setting should be based on a combination of benchmarking approaches (own performance, peers and science-based)
• Second Party Opinion: Where third-party verification was previously recommended, it is now mandatory and disclosed at least annually. The verification will be a limited assurance from a qualified external reviewer including an auditor, environmental consultant and/or independent ratings agency

Sustainability-linked loans aim to facilitate and support environmentally and socially sustainable economic activity and growth. Typically, they are any types of loan instruments and/or contingent facilities (such as bonding lines, guarantee lines or letters of credit) which incentivize a borrower’s achievement of ambitious, predetermined sustainability performance objectives.

Sustainability-linked Loans are already 292% up on full year 2020

U.S. loans with terms tied to ESG targets have jumped to about $52bn in volume this year through May 21, a 292% increase compared with all of 2020, according to Bloomberg data. Such debt was already picking up last year before Covid-19 struck due to growing appetite for sustainability linked finance.

ESG Loan Boom

U.S. loans with terms tied to sustainability goals surged four-fold to $52 billion

While loan volumes lag those in Europe where the debt structure originated, a green policy push by President Biden and greater awareness of social justice is bringing scrutiny to both bank lending and corporate exposure to ESG risks. Such debt instruments are linked to KPIs that include various sustainability goals or ESG ratings from companies such as Sustainalytics and EcoVadis, and have no restrictions on usage of funds. This is in contrast to green financing, where proceeds are restricted for environmental projects or investments.

So far, Europe accounts for more than 70% of global ESG-linked loans every year, encouraged by the EU’s regulations for sustainable financing. But while the region’s $87bn of SLL issuance this year outstrips the U.S., the latter’s fast pace of growth may help it catch up.

IEA’s net zero emissions by 2050 road map: member countries push back

• Japan and Australia have disputed the findings of the International Energy Agency (IEA)’s report on reaching net zero emissions by 2050, indicating they will continue fossil fuel despite the watchdog’s advice
• Critics, including the International Gas Union, say the IEA does not adequately acknowledge the risks to future energy security, and fails to provide a backstop should the world not manage to create adequate low-carbon alternatives to replace fossil fuels
• Japan has adopted a target of net zero emissions by 2050, but is struggling to formulate a plan on how to get there. Nuclear fuel is unpopular in the wake of the Fukushima disaster and the country’s mountainous islands make renewables relatively expensive
• IEA scenarios often form the basis of government energy policies, and the latest report on net zero emissions was praised by climate groups as a significant milestone. The report outlines a route to net zero emissions by 2050 in which coal demand falls 90%, gas demand falls 55%, and oil demand falls by 75%

Click here for a recap on the IEA report – “Net Zero by 2050 means no new oil production”

Towards net zero carbon emissions: Bank of England puts climate at the heart of its bonds plan in green push

The Bank of England (BoE) has unveiled plans to make its Corporate Bond Purchase Scheme (CBPS) ‘greener’ as the UK government aims to achieve net zero carbon emissions by 2050. The Bank will set targets for the overall emissions of its holdings, as well as investing in green corporate bonds when they are available. Although the BoE will not immediately sell-off bonds issued by businesses that have high carbon emissions, such firms will have a mandatory requirement to disclose emissions and must set out a roadmap to reduce them, or they risk no longer being eligible for bond purchases.

The BoE invests £20bn in corporate debt as part of its £895bn asset purchase facility, but does not disclose what corporate bonds it buys and campaigners have long suspected it buys debt issued by polluting companies in the oil and gas sector.

In 2020, the BoE said its investment portfolio was set to contribute to an average global temperature increase of 3.5°C by the end of the century — well above the 2°C warming limit agreed by world leaders at the 2015 UN Paris climate summit.

Network for Greening the Financial System calls for improved climate data

The Network for Greening the Financial System (NGFS) released a comprehensive report on bridging data gaps on May 26, 2021. Key takeaways from this report included:

• Reliable and comparable climate-related data are crucial in order for financial sector stakeholders to assess financial stability risks, properly price and manage climate-related risks, and take advantage of the opportunities arising from the transition to a low-carbon economy
• Persistent gaps in climate-related data hinder the achievement of these objectives. Stakeholders report the need for more detailed and forward-looking data that is assured in some way
• The need for a global consistent minimally accepted taxonomy

The NGFS is a network of 83 central banks and financial supervisors that aim to accelerate the scaling up of green finance and develop recommendations for central banks’ role for climate change.

G7 calls for mandatory climate disclosures

Over the weekend ending June 6, 2021, the G7 announced its support for a move towards mandatory climate-related financial disclosures, specifically backing the work of the Task Force on Climate-related Financial Disclosures (TCFD). It cites the need for high quality, comparable and reliable information on climate risks across the globe as an important catalyst for the historic announcement.

This announcement coincides with the launch of the Taskforce on Nature-related Financial Disclosures which will aim to deliver a framework for organizations to report and act on their nature-related risks.

Cambridge Center for Sustainability publishes guide tobank-client engagement

The University of Cambridge Institute for Sustainability Leadership recently published a guide, ‘Let’s Discuss Climate – The Essential Guide to Bank-Client Engagement’.

The report encourages banks and their corporate clients to interact, and aims to equip relationship managers to have meaningful conversations with their clients about their decarbonization plans and associated financing needs. While the report is really aimed at bankers, it provides a glimpse into possible bank strategy going forward.

CIBC related events and publications

Upcoming events

‘CIBC Sustainability: The view from Asia’

Wednesday June 30 @ 8:00 am – 9:30 am ET / 3:00 pm – 4:30 pm GMT / 8:00 pm – 9:30 pm CST

Please join our virtual CIBC Sustainability Conference which will feature discussions with Asia’s top experts on the following topics:

• The importance of Asian companies in the global energy transition
• Greening the balance sheet, sustainable infrastructure investment and the role of SPACs
• Energy transition strategies from international energy companies and state owned enterprises
• Asia policy momentum for decarbonization
• To learn more about this event, talk to your CIBC representative or visit the conference page and register directly

Past Events

‘Sustainable Finance – A View From the Thought Leaders’

Wednesday June 9, 2021

Listen to the perspectives on sustainable finance from Principles of Responsible Investing (PRI), Rocky Mountain Institute’s Center for Climate-Aligned Finance and the Institute for Sustainable Finance (Canada).

Click here to listen to the replay of the discussions.

Publications

‘The Sustainability Agenda’ – Podcast Series

CIBC Capital Markets latest podcast series focusing on the evolving complexities of the sustainability landscape – with a view on addressing current issues in a concise format to help you navigate and take action.

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