Increasing awareness of the risks climate change is presenting to the global economy is impacting all investment classes, including debt.
Within this investment class, there are two key focus areas:
- Understanding climate risk attached to any project seeking debt finance
- Opportunities to fund projects that are explicitly generating positive environmental or social impacts. This has given rise to the development of Sustainable Finance products
Understanding the climate risk attached to an investment is increasingly a matter of good due diligence and risk management. TCFD reporting require businesses to make explicit their approach to understanding and managing their climate risk exposure.
Sustainable Finance is more specifically focused on financing the transition to a low carbon economy and is a critical tool in our achievement of this goal. It is made up of a range of debt products, including Climate Bonds, Green Bonds, Sustainability Linked Bonds and Green Revolving Credit Facilities and Impact Funds.
Typically, these instruments are linked to a set of ESG criteria – a Green Loan or Finance Framework – against which a finance opportunity is assessed. Where the opportunity meets the criteria, the finance can be deemed to be Green or Sustainable Finance. This can bring benefits to the borrower in the form of a lower coupon or interest rate, and incentives such as reduced exit fees or penalties where targets are not met.