Inside this Topic Guide
There is strong international political and regulatory will and desire to develop climate smart, environmentally friendly financing. This is driven in part by the commitment in the 2015 Paris Agreement and the 2021 Glasgow Climate Pact to hold global average temperature increases well below 2 degrees celsius above pre-industrial levels and by the need for highly significant investment to support a low carbon future economy. Many governments and nations have also committed to ambitious net zero targets which aim to achieve the goals of the Paris Agreement. Many of these key commitments and goals were re-affirmed at COP26 in November 2021 with the Glasgow Climate Pact specifically emphasising the need to mobilise climate finance from all sources to achieve the Paris Agreement goals. Complementary to the net carbon reduction aims the United Nations Sustainable Development Goals adopted in 2015, also provide an international framework and we increasingly see financial products being aligned to these SDGs and broader ESG metrics.
There are a huge number of global and national initiatives and developments in relation to achieving these goals and other climate and environmental objectives for example, the EU's sustainable finance framework (which includes legislation relating to a taxonomy for sustainable activities, sustainability disclosures and reporting and ESG labels and standards), its Sustainable Finance Strategy and the European Green Deal; the UK's roadmap "Greening Finance: a roadmap to sustainable living" and 2023 Green Finance Strategy and key projects and analyses undertaken by IOSCO, the IFRS (including the development of global baseline sustainability reporting standards by the International Sustainability Standards Board (ISSB)) and the Task Force on Climate-Related Financial Disclosures (TCFD) see (Major Recent Developments below).
The now well established green bond market has been supported by the voluntary ICMA Green Bond Principles (GBP) which were developed by market participants and first published in 2014. A number of other principles and guidance reflecting developments in different types of sustainable bond financing, for example the Social Bond Principles (SBP), the Sustainability Bond Guidelines (SBG), the Sustainability Linked Bond Principles (SLBP) and related Q&A have subsequently published and are widely used in the market. ICMA acts as Secretariat to the Principles and these documents are available on its website. In addition to these market based sustainability issuance standards, the development of an EU Green Bond Standard (which aligns bond proceeds to EU Taxonomy aligned sustainable activities) was one of the recommended actions in the EU Commission's 2018 Sustainable Finance Action Plan. The Commission published its green bond standard proposal in July 2021 and a final agreed version was adopted by the Euroepan Parliament and European Council in October 2023. Publication of the final Green Bond Regulation in the Official Journal is expected in Q4 2023 and it will take effect 12-months after that. The sustainable bond market is now significant and issuance of green, social, sustainable and sustainability-linked bonds reached a high in 2021 exceeding USD 1 trillion (although volumes have come down subsequently).
Mirroring developments in the capital markets, the Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) published their own Green Loan Principles in 2018 which follow the same structure as the GBP. Subsequently the LMA published its Sustainability Linked Loan Principles (in 2019) and its Social Loan Principles (in 2021). In 2023 the LMA published model provisions for sustainability-linked loans and the LSTA published its own drafting guidance for US-style credit agreements. Other sustainable finance products, such as sustainable securitisation, are continuing to develop.
Please see also our Thought Leadership page on climate change, green finance and renewables and our ESG and sustainability: funds and investment management Topic Guide.
