Laith Cahill
Senior Net Zero Stewardship Specialist
Our recent banks roundtable discussed linking debt to the net-zero transition, exploring opportunities for greater engagement between bondholders and banks - here are three takeaways from a fruitful session.
Investors in the IIGCC Bondholder Stewardship working group and selected banks explored opportunities to align debt markets with climate objectives, referencing our recent paper, Unlocking the Net Zero Potential of Unlabelled Debt.
Carbon-intensive debt accounts for 29.5% of all non-financial corporate debt, surpassing the size of any other non-financial sector.
The importance of debt to the net zero transition is clear. Data from the London Stock Exchange Group (LSEG) has shown that as of June 2023, there is $5.5 trillion in outstanding carbon-intensive debt. Of this, labelled green bonds represent less than 7%, concentrated on a handful of sectors where the low-carbon transition is most advanced e.g. electric utilities and autos.
In fact, carbon-intensive debt accounts for a staggering 29.5% of all non-financial corporate debt, surpassing the size of any other non-financial sector. In contrast, carbon-intensive sectors represent only 19.6% of the global listed equities market, excluding financials.
These figures are a testament to the opportunities available for net zero stewardship in the debt market. Debt markets not only finance existing operations but also signal future priorities. Engaging effectively with this debt is a key tool for investors in their climate risk management.
Key engagement techniques
The roundtable provided valuable insights into effective engagement strategies for bondholders. Three important best practice lessons that came to light:
- Engage early and often
Proactive engagement before bond issuance is critical. Investor participation in roadshows—whether deal-related or not—and pre-issuance meetings provide opportunities to raise climate-related concerns directly with issuers and banks. If investors fail to ask climate-related questions during these events, both banks and issuers may undervalue the importance of these issues in practice.
- Engage on investment decisions
Our Bondholder Stewardship Guidance recommends communicating investment decisions with a clear rationale for engagement with issuers and banks. Explicitly tying investment decisions to engagement asks, where appropriate, sets out a clear pathway for transition. Decisions can be communicated to both issuers and syndicate banks. This approach not only signals the importance of climate considerations, but also sends a message with an eye to future issuance practices.
- Transparency on potential fund allocation
Investors may be able to enhance the impact of their engagement by clearly indicating which funds bonds are eligible for during the order process. This additional information helps banks and issuers understand how their offerings align with investor expectations and enables issuers to access broader pools of capital.
The pivotal role of banks
Banks engagement is a critical element of bondholder stewardship. As intermediaries between companies and investors, banks advise issuers on the structure and design of debt, underwrite issuances, and facilitate communication between stakeholders. This positions them as natural partners for investors seeking to incorporate climate risk mitigation considerations into bond offerings, providing further opportunities for investors to communicate their expectations.
In our Engaging Labelled Debt Guidance, we highlight the positive role that bank debt capital markets play in helping issuers develop green bond frameworks. As a result of this dynamic, structuring agents can push for ambitious climate targets and key performance indicators (KPIs).
Banks can also serve as a channel for investors to communicate their expectations. In our October webinar series for IIGCC members, we explored how investors have utilised relationships with banks to support engagement with otherwise unresponsive issuers.
IIGCC members: Watch our two-part webinar series - engaging on bonds
Banks as catalysts for change
The role of banks extends beyond structuring and underwriting. As aggregators of market feedback, banks can help to amplify investors’ climate priorities. Communicating engagement outcomes to banks not only influences individual issuers, it can shape market norms, fostering a broader cultural shift toward sustainability in the debt market.
Our work on supporting bondholder stewardship with banks highlights the potential of debt markets as a driver in the net zero transition. By employing strategic engagement through transparent communication and robust partnerships, investors are well positioned to encourage alignment of debt markets with climate risk mitigation goals..
Supporting investors by providing guidance, and sharing best practice is at the heart of work in our Bondholder Stewardship working group, our wider Banks Engagement and Research Initiative, providing the resources for investors to build their own strategies for engaging in this way.
Interested in our engagement work? IIGCC members have access to all the resources, webinars, and discussion groups in our engagement initiatives. Get in touch to find out more.