The narrative that emerges from this eight-part series on ‘sustainable finance’ is the growing sense of urgency to put the global economy on a path towards sustainable development. In this final instalment of the series, we reiterate the pivotal role of finance in realising the UN’s Sustainable Development Goals and the propensity for sustainable finance to be a catalyst for positive environmental, social and economic change.
As the global health crisis hit, a unique opportunity to build resilience for a sustainable recovery came to light. The drive towards lending markets and capital markets premised upon sustainability has brought to the fore a plethora of sustainable finance instruments and the need for these to form an integral part of the ‘new normal’.
The sustainable loan market
Indeed, looking at the sustainable loan market, we expect to see an exponential growth in the uptake of green loans and sustainability-linked loans (SLLs). While traditional plain vanilla loans have long been used across any industry sector under the sun, the superimposition of the non-mandatory ‘Green Loan Principles’ adds depth to the underlying raison d’être of the loan by linking the utilisation of the loan proceeds to the financing of green projects. SSLs go further, with the end-game being that of supporting an improvement in the borrower’s overall sustainability profile and credentials.
The sustainable bond market
On the other side of the spectrum, capital markets worldwide have frequently welcomed product innovation. Similarly to green loans, the use of proceeds of sustainable bonds, which encompasses green, social and sustainability (GSS) bonds, are earmarked for funding eligible sustainable projects. Conversely, sustainability-linked bonds (SLBs) are designed to incentivise a broader issuer base, focused on the attainment of predetermined sustainability objectives geared towards financing an issuer’s sustainability transition.
More investors are putting sustainability at the forefront of their investment decisions
Earlier this month, members of the sustainable finance team at Camilleri Preziosi attended a virtual workshop on ‘Green, Social and Sustainability (GSS) Bonds’, organised by the International Capital Market Association (ICMA), where a series of insightful presentations of ICMA’s voluntary set of principles was delivered.
An EU-wide taxonomy
The EU Taxonomy Regulation, which entered into force in July of this year, introduces an EU-wide classification system for “environmentally sustainable economic activities”. The taxonomy, described as a ‘living dictionary’ through which investors may assess the degree of sustainability of issuers’ economic activities, is expected to mitigate, if not eradicate, the lack of uniformity surrounding sustainable investments – ultimately enabling enhanced comparability across investments, increased accountability and greater access to sustainable finance.
Investing responsibly
Against today’s backdrop of economic uncertainty, more and more investors are now putting sustainability at the forefront of their investment decisions, looking beyond financial return alone and recognising the impact of environmental, social and corporate governance (ESG) factors on the risk-return attributes of investment.
Amid this ongoing transition to ‘responsible investing’, it is essential for businesses to adopt a more proactive approach to integrate ESG into their business models and strategies.
Looking forward
As the sustainable finance movement has gained momentum within the EU, Malta is now faced with the challenge – or rather, need − to rethink aspects of its lending and capital markets in an effort to do its bit in the transition towards a low carbon economy.
The Malta Financial Services Authority has acknowledged the initiatives being undertaken at EU level and has expressed its commitment to place sustainable finance as a core feature of its strategy. Looking ahead, it is anticipated that the implementation of EU legislation at the local level will continue to mould and strengthen the local sustainable innovation movement.
This piece forms part of Camilleri Preziosi’s ‘Sustainable Finance’ series, in which members of the firm’s capital markets and finance practice groups explore and evaluate the emerging trends and opportunities in the sustainable finance economy. For more information, e-mail malcolm.falzon@camilleripreziosi.com.