BR Interview | Simona Marin (Dentons): Financing for a sustainable future, the transition to net zero

Institutional investors are increasingly redirecting capital to sustainable real estate projects. The uncertainty in the real estate capital markets makes sustainable real estate projects more of a focal point. Debt and equity investors will have an elevated role in setting the standards for activities and practices which contribute to broader climate change mitigation goals These activities include: innovative use of building materials; innovative building design; energy efficiency production, management and performance technologies; low carbon heating systems and water efficiency technologies.

Green real estate projects must also consider the existing building stock which is expected to be around for the next 30 years. Demolishing buildings and replacing them with new green buildings may not be possible (i.e. listed buildings), cost-effective, environmentally sustainable or practical. Projects which look to retrofit existing building stock to low-emissions therefore making a substantial contribution to climate change mitigation efforts could qualify as sustainable loans (EU Taxonomy for Sustainable Activities); conversely, traditional refurbishment/capital expenditure investment would not be deemed sustainable may not ne bankable.

Green securitizations could be one of the most effective tools for funding sustainable assets, aggregating smaller-scale lending exposures and related exposures. These could include green residential mortgages for single-family detached residences, apartments, condos and coops and renovation loans. Securitization could allow for the right structural design, deal mechanics and investment size for institutional investors thereby mobilizing finance that would not otherwise be available for certain borrowers, property-types and real-estate sectors. While the recently revised European Securitization Framework is still not widely appealing to issuers (including would be green mortgage issuers) and institutional investors, an overhaul could provide banks with capability to originate and securitize a broader range of sustainable loans and free a torrent of capital for new sustainable projects and green mortgages. To facilitate financing of sustainable assets and their subsequent securitization, review and improvement of the EU Securitization Framework should be a priority for EU Legislators.

The Loan Market Association and Asia Pacific Loan Market Association published the Sustainability Linked Loan Principles (SLLP) in May 2020 in collaboration with the International Capital Markets Association (ICMA). Green Loan Principles (GLP) were published by the same in March 2018.  The SLLP and GLP are designed to coexist with the Green Bond Principles (GBP) published by the ICMA in June 2018. The SLLP, GLP and GBP are collectively designed to represent a framework of market standards and voluntary guidelines that market participants can adopt across the green loan market.

EU regulations with direct, simultaneous applicability in all member states will combine with secondary EU legislation to set up a comprehensive framework for sustainable investment

Taxonomy Regulation (Regulation 2020/852 amending Regulation (EU) 2019/2088)

Entered into force into 12 July 2020

Represents the core of a comprehensive framework for sustainable investment

Establishes an EU-wide classification system for business and investors to determine whether economic activities can be considered environmentally sustainable

Sets performance thresholds through it’s Technical Screening Criteria for economic activities which make a substantial contribution to one of the following six EU environmental objective

• Climate Change Mitigation
• Climate Change Adaptation
• Sustainable Use and Protection of Marine Resources
• Transition to a Circular Economy
• Pollution Prevention and Control
• Protection and Restoration of Biodiversity of Ecosystems

Provisions of the EU Taxonomy for Sustainable Activities also Impose new disclosure requirements for certain financial services firms and large public-interest entities, building on existing requirements imposed through the Disclosure Regulation

Disclosure Regulation

(Regulation 2019/2088 on sustainability-related disclosures in the financial services sector)

Entered into force on 29 December 2019

Main provisions apply from 10 March 2021 unless modified by the Taxonomy Regulation

The European Supervisory Authorities, including the European Securities and Market Authority; the European Banking Authority; and the European Insurance and Occupational Pensions Authority are required under the Disclosure Regulation to develop regulatory technical standards specifying the level of detail and the amount of information on sustainability investments targets to be disclosed in pre-contractual documents, periodical reports and websites of financial market participants.

Low Carbon Benchmark Regulation

(Regulation (EU) 2019/2089 amending Regulation (EU) 2016/1011 (BMR))

Entered into force on 10 December 2019. Extends the transition period to that pre-existing critical benchmarks can continue to be published until 31 December 2021 without applying for authorization or registration under the Benchmark Regulation

Sets out a regulatory framework that outlines minimum requirements for EU Climate Transition Benchmarks and Paris-Aligned Benchmarks, at the EU level, to ensure that activities related to the fundamental assets underlying the benchmarks do no significantly harm other ESG objectives.

The financial community has acknowledged climate-risk as a systemic and existential threat to financial stability.  Many banks already integrate sustainability into their core businesses by incorporating ESG considerations into: strategic direction; enterprise risk-management frameworks and product design. Large diversified financial institutions have pledged significant capital and client support across a wide variety of sectors to transition to lower carbon emissions.

Environmental and climate risks can emerge as event-driven situations or occur over a longer time horizon causing damage to a financial institution’s franchise value through heightened reputation risk, headline risk and a variety of material financial risks.

As the COVID-19 pandemic brings into sharp focus the importance of disaster preparedness and continuity planning, investors, regulators, banks and credit rating agencies will continue to look for ways to identify, measure, evaluate, price and report ESG risks.

Climate change-related investment products have evolved and developed considerably. Some of these products include climate bonds, green bonds, social bonds, sustainability bonds and a variety of securitization and derivative product-sets. Notably the markets continue to see an increasing number of type of environmentally driven and climate oriented funds investing in and financial institutions lending companies developing solutions to climate change

While international financial institutions have been leading the way in financing the circular economy, commercial banks are getting actively involved. Romania sees regional commercial are increasingly syndicating sustainable loans. Notably, Raiffeisen Bank has contributed significantly to sustainable economic development and lending towards green projects.