sustainable finance update · enel spa: sdg-linked bond with built-in incentives –not...

Sustainable finance update 17 October 2019

Climate & Sustainable Finance Research

What is the role of sustainable finance v 2.0?

SEB Climate & Sustainable Finance Research | Sustainable finance update 15-10-2019 2

From raising awareness to changing the economic system

Society

How does this create a better society?

Investment case

How does this relate to the business? What is the economic rationale?

Are there unpriced externalities?

Define sustainable

Clear definition of sustainable financial asset

Governance

Guidelines for selecting projects/targets

Monitoring/Verification Verification process and data

disclosure

Allocate capital better

Creating an impact and enhancing risk-adjusted return

Access to information Transparency to facilitate

repricing of assets

Regulation* Internalizing the externalities:

create a cost of capital ‘wedge’

*: this is where central banks and regulators come in

Green bond market on track for record 2019 First 9 months of 2019 issuance is running above our bull case

Source: SEB analysis based on Bloomberg and SEB data, as of 30 September 2019

15-10-2019 SEB Climate & Sustainable Finance Research | Sustainable finance update 3

240

210

183 180


Sector distribution: private sector share rising Corporates, financials and agencies now 60% of total issuance

Green Bond market growth by sector (USD bn) Sectoral evolution (% share of annual issuance)


Europe and Asia lead the way


Last 12 months moving sum of issuance (USD bn)


Not just green bonds: new instruments Annual issuance (USDbn) across sustainable finance loan types

15-10-2019 SEB Climate & Sustainable Finance Research | Sustainable finance update 6

Source: Bloomberg (BNEF), as of 30 September 2019

Sustainable investment v 2.0: transition

Source: SEB analysis

INVESTORS ECONOMY & TECHNOLOGY

SECURITY & RISK

MANAGEMENT

POLITICAL FORCES

SOCIAL FORCES

FINANCIAL REGULATION

Environmental and Biophysical Stress

7 15-10-2019 SEB Climate & Sustainable Finance Research | Sustainable finance update

Energy technology cycle: the 30-30-30 model


Renewables show same disruptive pattern as IT: it’s profitable

30-year incubation: decades of losses as

new technology is being developed

30-year disruption: exploding volumes,

collapsing prices, new monopolies

30-year stabilization: Regulation to secure

gains are passed on to consumers

T-30 T+30 T=0 T+60


All tech revolutions start with a tipping point Disruption starts when ‘killer app’ cuts price below incumbents

Carnegie steel works, 1875 Ford T - Highland Park factory, 1914

IBM Personal Computer, 1981 Tesla model S, 2012

Now renewable energy is past tipping point


Over past decade, both explosive growth and collapsing prices

Incubation: subsidies needed for the first 30 years of development

Disruption: renewable investment is profitable

The Great Electrification: technology is ready


Electrification is cheap enough now, will become even cheaper

Energy transition: markets are not fast enough


If we need to reach 100% in 2050, we have to lift capex faster

Plenty of capital is waiting to be activated


The paradox: money is free, why not invest in energy transition?

Sustainable investment v 2.0: regulation

Source: SEB analysis

INVESTORS ECONOMY & TECHNOLOGY

SECURITY & RISK

MANAGEMENT

POLITICAL FORCES

SOCIAL FORCES

FINANCIAL REGULATION

Environmental and Biophysical Stress

14 15-10-2019 SEB Climate & Sustainable Finance Research | Sustainable finance update

‘Green’ capital available – how to allocate it?


UN PRI signatories now represent more than 30% of global AuM

6.5

10.0 13.0

18.0 21.0

24.0

32.0 34.0

45.0

59.0 62.0

68.4

81.7

86.3

20.1

0

10

20

30

40

50

60

70

80

90

100

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

US

D t

rill

ion

# o

f sig

na

tori

es

Number of AOs Number of Signatories Assets under management (US$ trillion) AO AUM ($ US trillion)

ESG 2.0: who will deliver energy transition?

SEB Climate & Sustainable Finance Research | Sustainable finance update 15-10-2019

Dirty sectors build infrastructure: we have to work with them

Storage technology

Smart grid and transmission

infrastructure

Gas, biofuels to replace coal during transition

Solar and wind: utility-scale generation

Micro-level power generation and storage

Infrastructure for sustainable transportation

Sustainable production (All equities: ESG)

Materials

Energy-efficient building stock

16

https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwiHyt6dv6HeAhWLlIsKHZAGBa8QjRx6BAgBEAU&url=https://www.originenergy.com.au/blog/about-energy/electricity-grid-how-electricity-gets-to-you.html&psig=AOvVaw1uVY6y9xVvD4yFggle21bS&ust=1540553068327605

10

100

1000

Financials Health Care IT CommServ ConsDisk ConsStap RealEstate Industrials Energy Materials Utilities

Tons

CO

2 eq

uiva

lent

s / U

SD m

rev

enue

(log

sca

le)

ESG 2.0: from exclusion to intra-sector ‘wedge’


Markets will reward those who reduce emissions in ‘dirty’ sectors

EU taxonomy: internalizing the externality


Aim is to shift capital to transition leaders in high-emission sectors

Climate benchmarks can’t underweight high-emission sectors!

TAXONOMY ‘RULEBOOK’

BENCHMARKS

GREEN BOND STANDARD

DISCLOSURES

Taxonomy, EU Green Bond standard to reduce bond market’s

‘greenwashing’ concerns

Transparency pushes investors into action

Two examples highlighting new trends


Two recent bond issues that highlight new trends:

Enel SpA: SDG-linked bond with built-in incentives – Not ‘use-of-proceeds’ – looks at whole company – Yield +25bp if renewable share <55% in ‘21

Teekay Shuttle Tankers: Green bond, non-green sector – Green bond from high-emission sector with impact – Used to finance vessels that reduce CO2 emissions

New types of sustainable bonds/new types of green bond issuer

Growth likely to come from ‘transition bonds’


Taxonomy will expand Green Bond issuer base, range of projects

Where is sustainable finance headed?


Sustainable finance is moving: 1. From Green Bonds to Transition finance

2. From bonds & loans to all financial instruments

3. From expert-driven niche to full integration

Building on initial successes, we are ready for the next stage

Thomas Thygesen Head of Strategy

Mobile +45 2147 9656 Phone +45 3328 1008

[email protected]

@thomasthygesen

Elizabeth Mathiesen Senior Strategist

Mobile +45 2855 1747 Phone +45 3328 1077

[email protected]

Tine Vist Quantitative Strategist

Mobile +45 2030 4062 Phone +45 3328 1007

[email protected]

This report has been compiled by SEB Large Corporates & Financial Institutions, a division within Skandinaviska Enskilda Banken AB (publ) (“SEB”) to provide background information only. Opinions, projections and estimates contained in this report represent the author’s present opinion and are subject to change without notice. Although information contained in this report has been compiled in good faith from sources believed to be reliable, no representation or warranty, expressed or implied, is made with respect to its correctness, completeness or accuracy of the contents, and the information is not to be relied upon as authoritative. To the extent permitted by law, SEB accepts no liability whatsoever for any direct or consequential loss arising from use of this document or its contents. The analysis and valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties; different assumptions could result in materially different results. The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or warranty by or on behalf of the SEB Group or any person or entity within the SEB Group that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realised. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. Anyone considering taking actions based upon the content of this document is urged to base investment decisions upon such investigations as they deem necessary. In the UK, this report is directed at and is for distribution only to (I) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (The ‘‘Order’’) or (II) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as ‘‘relevant persons’’. This report must not be acted on or relied upon by persons in the UK who are not relevant persons. In the US, this report is distributed solely to persons who qualify as ‘‘major U.S. institutional investors’’ as defined in Rule 15a-6 under the Securities Exchange Act. U.S. persons wishing to effect transactions in any security discussed herein should do so by contacting SEBEI. The distribution of this document may be restricted in certain jurisdictions by law, and persons into whose possession this documents comes should inform themselves about, and observe, any such restrictions. This document is confidential to the recipient, any dissemination, distribution, copying, or other use of this communication is strictly prohibited. Skandinaviska Enskilda Banken AB (publ) is incorporated in Sweden, as a Limited Liability Company. It is regulated by Finansinspektionen, and by the local financial regulators in each of the jurisdictions in which it has branches or subsidiaries, including in the UK, by the Financial Services Authority; Denmark by Finanstilsynet; Finland by Finanssivalvonta; and Germany by Bundesanstalt für Finanzdienstleistungsaufsicht. In Norway, SEB Enskilda AS (‘ESO’) is regulated by Finanstilsynet. In the US, SEB Securities Inc (‘SEBEI’) is a U.S. broker-dealer, registered with the Financial Industry Regulatory Authority (FINRA). SEBEI and ESO are direct subsidiaries of SEB.

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sustainable finance update · enel spa: sdg-linked bond with built-in incentives –not...

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