This full-year wrap will cover trends in the European sustainability-linked loan, or SLL, and high-yield bond, or SLB, markets in 2023, and what we expect in 2024.
Key Takeaways
SLL volumes increased in 2023 to €10.6 billion, while SLB volumes slightly decreased to €5.1 billion.
The issuance of SLBs decreased to 9% in 2023, making us think that SLB issuance will continue decreasing in 2024.
Sustainability terms in SLBs and SLLs are largely similar to those recorded last year, although SLBs doubled their penalty in 2023 paying a 25 bps annual increase to the coupon for each sustainability performance target not met and 2023 SLLs offered a more modest 7.5 bps cumulative upward and downward adjustment to the margin compared with 10 bps in 2022.
Amendment provisions to address the impact of a significant event continue to proliferate in SLBs and SLLs in 2023, the inclusion of which is now standard in European sustainability-linked documentation.
SLLs and SLBs in 2023 enhance transparency through more reporting and external verification requirements.
2023 SLBs focus on “E,” “S” and “G,” issues for the first time, while environmental and social concerns dominate in 2023 SLLs.
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EU Taxonomy Disclosure Challenges for Asset Managers
In response to escalating environmental challenges, the European Union (EU) has devised a tool to steer investments toward sustainable endeavors: the EU Taxonomy.
The EU Taxonomy serves as a classification system that helps define economic activities that are environmentally sustainable through four overarching conditions, outlined in Article 3: contribute to at least one of the six environmental objectives, do not significantly harm any of the environmental objectives (DNSH), comply with minimum safeguards, and with technical screening criteria.
How is an economic activity taxonomy aligned?
In 2023, the largest non-financial corporations reported on how well they adhered to the Taxonomy’s initial environmental goals, focusing on climate mitigation and adaptation. In addition, financial institutions disclosed the degree to which their assets met the criteria for alignment with the Taxonomy.
How companies are reporting or how should they report?
Non-financial companies are required to report on the proportion of their turnover, capital expenditure (CAPEX), and operating expenditure(OPEX) related to products, services, or processes associated with economic activities that qualify as environmentally sustainable.
For example, a vehicle manufacturer falls within the scope of the EU Taxonomy being considered eligible. However, only the manufacture of low-carbon technologies for transport that contribute to climate mitigation would be taxonomy-aligned (1). This means that only electric vehicles, and hybrid vehicles, if they meet the specific emissions criteria, are aligned with the Taxonomy’s sustainable criteria.
In the case of Mercedes Benz Group, the company stated in its 2022 Sustainability Report that 88% of its turnover was taxonomy-eligible and 10% was taxonomy-aligned, as seen below, succeeding in making a substantial contribution to the Climate Change mitigation objective, passing the Do No Significant Harm (DNSH) criteria and comply with minimum safeguards. When it comes to capital expenditures, the company reported that 78% was taxonomy-eligible and 22% was aligned. While operating expenditures are 65% eligible and 35% aligned.
Source: ESGx by Reorg, Mercedes Benz Group 2022 Sustainability Report
In 2021, estimates and early testing of the climate taxonomy criteria have shown a low overall Taxonomy alignment today in companies’ activities and investment portfolios (between 1% and 5%, with many companies and investment portfolios standing at zero) (2).
In 2024, companies are still struggling to navigate the complexity of the regulation. Most private companies do not report on taxonomy-eligible activities as some may not fall under the regulatory requirements or may need more resources to conduct the necessary assessments. As the Corporate Sustainability Reporting Directive is being rolled out, we anticipate an increase in companies reporting taxonomy-related data.
Why should Asset Managers report? For asset managers, the EU Taxonomy is important for several reasons:
The Taxonomy provides a standardized way to identify and categorize environmentally sustainable activities, helping asset managers communicate with clarity about the sustainability of their investments.
It enhances transparency by offering a clear set of criteria for what qualifies as environmentally sustainable.
Asset managers can use the EU Taxonomy to assess and mitigate environmental risks in their portfolios.
Following the EU Taxonomy can enhance the credibility of asset managers in the market.
The Taxonomy is a deterrent against greenwashing, where companies overstate their environmental credentials
What is the difficulty for Asset Managers?
Asset managers must disclose taxonomy-related information both at the product and entity levels. This includes details on the alignment of financial products with the Taxonomy and the proportion of investments aligned with sustainable economic activities.
To report on Taxonomy alignment at the product level, asset managers are required to go through all the underlying assets within a fund’s portfolio to determine if they contribute to any of the six environmental objectives. Given the diversified nature of funds, such a calculation requires extensive data collection from investee companies along with substantial allocation of time and human capital resources.
How does it work in practice?
The disclosure of taxonomy-aligned activities at the company level feeds up into disclosures of taxonomy-aligned activities at the portfolio level. The graph below provides a simplified explanation of how to apply the Taxonomy, considering turnover as the proxy for equity exposure to Taxonomy-aligned activities.
Example: How to apply the Taxonomy to an equity portfolio Source: Technical Report, EU Technical Expert Group on Sustainable Finance, 2020
ESGx by Reorg has worked with the private markets to solve disparate data collection and reporting for SFDR, TCFD, and exercises across other regulatory and investor reporting requests since inception in 2021. As the EU Taxonomy reporting comes live, ESGx by Reorg is well-positioned to integrate and collect the KPIs for the reporting exercise, as the data becomes available.
Shifts in regulations, as well as investor demand for more transparency and heightened accountability when dealing with climate-related disclosures, have driven an increase in green house gas emissions (GHG) reporting. Reorg’s latest study, Greenhouse Gas Emissions Reporting in the Private Marketsexplores how private companies perform in comparison to the latest trends in the global ESG market.
Included in the whitepaper are:
Overview of Scope 1, 2 and 3 emissions
Analysis of WELLI and LLI indexes, centered on scope 1 and 2 emissions across:
Distribution by Global Industry Classification Standard Sector (GICS)
GHG emissions intensity
Distribution of company emissions by GICS sector
Outliers
GHG reduction targets and science-based targets
To dive deeper into the data, download the white paper today and explore ESGx by Reorg, which provides standardized ESG and sustainability reporting for the leveraged finance and private assets markets.
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Sustainable Finance Disclosure Regulation deadline: How ESGx can help
Today, June 30, marks the reporting deadline for Sustainable Finance Disclosure Regulation, or SFDR, which requires asset managers, investors and other financial market participants to disclose their integration of sustainability risks and consideration of adverse sustainability impacts for their investment decisions.
Ahead of this deadline, the ESGx by Reorg team has successfully delivered reporting on more than 100 individual funds and expects to continue publishing additional funds through the due date. As a trusted regulatory reporting partner, we’re excited to continue delivering this critical information to our customers with our transparent, auditable data and cutting-edge reporting technology.
Given the successful delivery of the first SFDR PASI Statements, ESGx by Reorg is excited to launch Task Force on Climate-Related Financial Disclosures, or TCFD, reporting with our market participant working group as the regulation threshold lowers to 5 billion in AUM next year.
With the advent of these new measures to increase transparency regarding sustainable finance practices, ESGx by Reorg is continuing to evolve reporting to meet emerging needs in the United States and United Kingdom.
The EU has rolled out new ESG related disclosure requirements, the Sustainable Finance Disclosure Regulations, or SFDR, which impacts many EU-based assets managers. The first SFDR reporting deadline of June 30, 2023, is fast approaching. Luckily, we are in a good position to help any manager in the private credit space comply with the new requirements. In fact, our ESGx team has been working with credit investors and legal advisors for almost two years to make sure we have a consistent and comprehensive solution to the disclosure requirements.
The goal, as it has been for ESMA Article 7 reporting, is to employ scalable technology and a uniform approach to the reporting standards to make sure all industry participants can meet their regulatory and contractual requirements, while adopting standardized procedures and comprehensive audit trails. We are proud to be selected as a trusted partner by many of the leading credit managers.
Regards, Tejs Broberg
Reorg’s editorial teams are working tirelessly to bring subscribers the most in-depth data, analysis and reporting on more than 6,000 performing and distressed credits. A glimpse into our offering is shown below:
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ESGx by Reorg Simplify the process of ESG and sustainability reporting with ESGx by Reorg, which provides a resource for regulatory reporting, including SFDR, TCFD and upcoming sustainable finance disclosures as well as a standardized source of reportable ESG metrics for the market’s evolving requirements. Learn more.
On May 10, the ESGx by Reorg team provided insights into navigating the Sustainable Finance Disclosure Regulation, or SFDR. The panelists discussed the disclosure requirements of an article 6, 8 or 9 fund and reviewed solutions for publishing the annual principal adverse sustainability impact, or PASI, statement. Watch the replay.
In this week’s edition of the Reorg Primary View podcast, Andrew Sung, head of research at Atlas Credit Partners, discusses middle-market financing, the opportunity set following the collapse of Silicon Valley Bank and lending against intellectual property with Reorg’s James Holloway. Listen to the full episode here.
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