In the Loop: Additionality, fraud concerns and our asset owner survey

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Breaking the disclosure promise

The great promise of the use-of-proceeds ESG bond market has been additionality – that ringfenced funds will go directly to fund new projects that have a positive impact in the fight against climate change or social ills.

Refinancing of existing projects and assets is permitted, but best practice recommendations from the International Capital Markets Association call for issuers to disclose the share of new financing versus refinancing.

These recommendations do not appear to have been taken to heart by the market, according to figures from a new Fitch report.

Analysts at Sustainable Fitch looked at bonds in its ESG instrument rating universe and found that 95 percent either allocated less than 25 percent of proceeds to new projects or did not disclose the split.

While the rating agency didn’t name issuers, it noted that “a large western European bank” and “a northern European power operator” did not disclose a limit to refinancing in their frameworks – which has had a negative impact on their bonds’ ESG assessment by Fitch.

The week in RI

This week, we reported on Nordea Asset Management’s move to broaden the investment universe of its gender fund, and subsequently downgrade it from Article 9 to 8 under the SFDR. This revealed that there is uncertainty around how to classify DE&I funds under the EU’s fund disclosure regime.

Also on SFDR, there are growing concerns around the misalignment between reporting requirements of investors and corporates. This has been triggered by the European Commission’s move to make almost all indicators under the new corporate rules subject to materiality assessments.

In other company reporting news, Tom Seidenstein, chair of the International Auditing and Assurance Standards Board, told Responsible Investor that the standard setter is working closely with the EC to ensure its global sustainability assurance standard is developed “in line” with the EU’s CSRD rules.

Finally, the AIGCC’s utility engagement group has made the linking of executive compensation to climate-related KPIs a top governance priority, and our reporter Gina Gambetta looked into how investors are ramping up demand-side engagement amid frustration with fossil fuel majors.

Quote of the week

“I’m pretty sure it’s going to be rife with fraud. There will be a lot of companies saying they’re doing things that they’re not doing just to get some of that money”

A fraud specialist shared with RI their concerns about the US Inflation Reduction Act might attract. Representing around $500 billion in new spending and tax breaks, the IRA has been dubbed the most significant climate legislation in US history.

Asset owner survey: ESG initiatives 

As promised last week, RI is launching a survey to find out how time and resource-constrained asset owners are thinking about the memberships of the plethora of ESG and sustainability-focused initiatives they have accumulated over the years.

Rest assured all responses will be fully anonymous unless you choose to share your details.

We want to hear from funds about how they manage their commitments, where they see most value, and where they feel memberships may have run their course – and, potentially, the challenges around extricating themselves from them.

We will also be reaching out to asset owners directly but please feel free to click and share the link.

Today’s letter was prepared by the RI editorial team.