August 2, 2022
Green financing mechanisms emerge as key lever for corporates to fulfill sustainability targets
In this last of a two-part series, TD Bank Group discusses the massive growth of sustainable capital markets as corporates seek to fulfill commitments to the climate transition. Headquartered in Toronto, Canada, and with more than 90,000 employees around the world, TD is a top 10 North American bank that ranks among the world’s leading online financial services firms. TD is the fifth largest bank in North America by assets, with more than 26 million customers. Click here to read the first part of the series.
Part 2
The growth of sustainability-linked financing mechanisms
Sustainability-linked debt (SLD) is the newest and fastest growing segment of sustainable capital markets, emerging as a popular financing mechanism for corporations to demonstrate accountability and commitment to sustainability.
Unlike legacy green or social bonds where proceeds are ringfenced for pre-approved activities, proceeds raised from sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs) can be used for general corporate purposes. The coupons or interest rates are linked to the achievement of predetermined environmental or social objectives, providing real financial incentives to reach sustainability targets.
Although created just two years ago, sustainability-linked debt has moved from representing 2 percent of sustainable capital markets in 2017, to 32 percent in 2021. SLBs saw an 800 percent growth between 2020 and 2021; the SLL market nearly tripled from ~$130B to ~$375B.
“Sustainable finance capital markets broke a trillion and a half last year,” said Sophie Dejonckheere, a Director on the TD Securities Sustainable Finance & Corporate Transitions team. “It’s a huge market; it has doubled and even tripled each year. Sustainability-linked bonds and sustainability-linked loans are the fastest growing products within that explosive market.”
SLD can be a good fit for clients that do not have sufficient green or social assets to justify a green bond, but who still want to demonstrate their commitment to green or social sustainability targets, Dejonckheere says.
“That’s why it’s so exciting,” she said. “So many of our clients are very keen to show that they are committed to the climate transition. They have great initiatives that they want to showcase. SLD allows clients to link their interest rates or coupons to sustainability targets. This means that a client could get a discount on their loan interest rate if, for example, they reduce their emissions in line with their net zero target. That’s a great story for them. The flip side is they could pay a premium if they miss the target–the structure of the product is developed in close collaboration with the client. But the bottom line is that it gives real financial incentives to make changes with impact.”
These products have given companies in hard to abate sectors the opportunity to highlight their decarbonization efforts. As an example, TD helped a major oil and gas company set up their inaugural SLL, which allowed them to reduce their borrowing costs by meeting Scope 1 and Scope 2 emissions reduction targets by predetermined deadlines.
“We’ll be seeing the first annual impact reports for SLD in the coming two years; I think that will generate a lot of interesting and exciting data,” Dejonckheere added.
Investing in decarbonization
This year, TD disclosed net zero-aligned 2030 interim financed Scope 3 emissions targets for two high-emitting sectors.
The targets extend beyond TD’s own operations and include its “financed emissions,” or the emissions of the companies to which TD provides and facilitates capital.
“We have increased focus on how we use our financing activities and different financial products to effect change,” said Nicole Vadori, Vice President, Head of Environment, at TD. “Scope 3 financed emissions are by far the biggest part of our footprint. So, if we can work with our clients to help them tackle their emissions, that’s where we’re going to have the most impact.”
TD Securities recently developed its sustainable investment strategy to support TD’s broader decarbonization initiatives, including a commitment to invest $100 billion towards low carbon emissions by 2030.
As part of that strategy, TD Securities has made some cornerstone investments in several leading North American private equity and venture capital funds that are focused on the clean energy transition.
TD is currently working with five funds, which together represent an aggregated $6 billion in financing for 60 companies that are developing cutting-edge, low carbon solutions. Each of these funds will evaluate hundreds of opportunities in any given year and curate those that promise the most impact and return for the investors.
“We’re undergoing an evolution right now,” Vadori said. “One of our senior executives always says, ‘ESG is moving from being the icing on the cake to being baked right into the cake.’ And this is certainly true for TD. We see ESG in every corporate function, in every business segment at TD.”
TD recently brought ESG expertise into their economics, legal, accounting, and risk management functions, among others.
“We’re turning our attention to the intersection of environmental and social issues,” Vadori said. “The thing I hear often is that the environmental issues of today are going to be the social issues of tomorrow. In solving the climate crisis, we need to understand that intersectionality, and with our focus on economic and financial inclusion, we are better equipped to ensure that actions taken in one area do not have unintended consequences in another.”
TD continues to monitor top emerging risks, many of which are laid out in the World Economic Forum’s 2022 Global Risks Report, released in January. The report presents the results of the latest Global Risks Perception Survey (GRPS), followed by an analysis of key risks emanating from current economic, societal, environmental, and technological tensions.
“Interestingly, out of the top 10 long-term global risks, the first five are environmental,” Vadori said. “The first two deal with climate change and the next three are related to biodiversity and resource loss. There’s so much intersectionality between climate change and biodiversity loss and from an economy perspective, natural resource loss is particularly concerning given resource use is closely tied to GDP. What happens when those resources are no longer available because they are depleted? All these issues are interconnected and as a global community we need to think holistically in order to address them. That’s the next ESG frontier.”
