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ESG Economist – Is there a business case for sustainability?
Sustainability and climate change seem to have lost relevance in a world marked by tariffs, wars, and inflation. This note aims to establish a business case for sustainability, despite a loosening of regulatory standards and less participation of greens in the European Parliament.
ESG Strategist – Sustainability-linked bond market at a crossroads
Back in September 2019, the Italian utility company Enel issued what would be the first ever sustainability-linked bond (SLB). In total, since 2019, EUR 257 billion was issued by 400 issuers through 823 SLBs. The SLB market reached a peak in 2021, fuelled by the entry of prominent issuers, and has been steadily declining since 2022, due to unfavourable economic conditions, rising interest rates, and heightened concerns around the credibility of the SLB market have hampered volumes since. Last year, SLBs accounted for 5% of all ESG bonds listed worldwide (i.e., green, social, sustainability, and sustainability-linked bonds).
ESG Economist - German election result to slow down but not derail climate policy
The next German coalition government will likely include the CDU/CSU and the SPD, reviving the famous GroKo (Grand Coalition), and following on the heels of what was considered as one of the most “climate ambitious governments” in the world.
ESG Strategist - Investors pricing rating downgrades for TotalEnergies
Last week, the oil and gas company TotalEnergies issued a EUR 1.3bn 20-year unsecured bond, which attracted over EUR 3bn in orders. Considering the global energy transition, it is important to examine how oil and gas companies are positioning themselves and how investors anticipate their future trajectories. An analysis of the bond curves for oil and gas companies reveals that these bonds, particularly those with longer maturities, are trading at levels comparable to those of lower-rated companies. These results may suggest that investors expect these companies to be downgraded by two to three notches in the future.
ESG Strategist - Omnibus: watering down EU’s climate ambitions
Yesterday, the European Commission (EC) published the Omnibus proposal (1). This proposal follows the recommendations of the Draghi report (2) and the EC’s promise to reduce administrative burdens by at least 25% and by at least 35% for SMEs before the end of the mandate in 2030. It aims to provide substantial simplification in the field of sustainability regulations, while squaring the EU’s ambitions towards a sustainable transition and enhancing EU companies’ competitiveness. The package released by the EC includes amendments to the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the InvestEU Regulation, and the Carbon Border Adjustment Mechanism (CBAM), which we will analyse in a later note. The package is accompanied by a draft Taxonomy Delegated Act for public consultation. In this note we will analyse the proposed changes and compare them to the previous regulations. Moreover, we conclude by making an assessment of how these changes will impact the transition and the achievement of EU’s 2050 climate targets.
ESG Strategist - Omnibus: simplifying or watering down EU’s regulations?
On November 8, 2024, the EC President Ursula von der Leyen announced that existing and upcoming EU ESG reporting requirements will be integrated into an omnibus regulation. An omnibus is a regulatory measure or set of rules that encompasses a broad range of issues or topics within a single document or framework. The EC’s goal with this approach is to streamline the growing number of requirements faced by companies, ensure consistency across related areas, and simplify processes for both regulators and those being regulated. In this overview, we will examine the three existing regulations likely to be unified under the forthcoming omnibus: the EU Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD). Our objective is to clarify the purpose of each regulation, explore each regulation’s flaws and discuss how the upcoming omnibus might overcome these flaws and streamline the three regulations.
ESG Strategist - Climate disasters to exacerbate European fiscal deficits
Global warming is resulting in a rising number of climate and weather-related disasters. Although annual data is volatile, the costs of these disasters as a share of GDP are on a rising trend and expected to continue increasing during the coming years, even in a favourable 1.5°C global warming climate scenario where the targets of the Paris Agreement are met. In a previous research note ‘Which EU countries will suffer the most from extreme climate disasters?’ [1] we focused on the economic impact of climate and weather-related disasters in the EU at an individual country level under various scenarios of global warming. In this note we look more in depth at the impact on the public finances for a number of EU countries, namely their debt ratio levels, the impact on sovereign yields, and, ultimately, on their sovereign ratings.
ESG Economist - More consistent climate tax policies are necessary for the transition
On 1 July 2023, the Dutch Government raised the excise tax on fuels, reversing the cut in 2022. The former exacerbated the price difference between Dutch and German fuel by 14 cents per litre. This note examines whether Dutch households living near the German border responded differently to this policy change compared to households in the rest of the Netherlands. The findings reveal that households in the border region decreased their consumption of Dutch fuel more than households in the rest of the country by an additional 3.6 litres, per week. This suggests that people in the border region are more sensitive to relative fuel prices. When policies are not aligned, people (partly) shift their consumption towards the lower tax country. As we approach 2030, the first deadline for EU emissions’ reduction targets, aligning climate tax policies is important for effectively reducing emissions.
ESG Strategist - Are credit rating agencies overlooking climate risks?
Climate risks are mounting across the world and Europe is not immune to this global development. The devastating floods in Valencia and the wildfires in Portugal are just recent examples of a phenomena that is expected to become increasingly frequent. As it was noted in our previous research (see [1]), acute physical risks – such as floods, or wildfires – can result in significant direct economic damages, such as the loss of buildings, livestock, natural resources and infrastructure, which in most instances is only partly insured. Moreover, climate-related disasters can also have longer-term impact on economic growth. These can ultimately affect the ability of a country to repay its debt, such that climate-related risks should be – if not already - considered by credit rating agencies. Hence, in this note, we aim to dive deeper into sovereign ratings, in order to understand whether climate-related indicators are accounted for by rating agencies when assessing country risks. We solely focus on climate-related indicators, given that past research has proven that the social and governance pillars (the other components within the E, S and G) remain the biggest drivers of sovereign risk premia (the exception being low-income countries where some environmental variables stand at the forefront - see [2]). This note is structured as follows: below we discuss the data and the methodology used, followed by our interpretation of results. Finally, we finish the note by offering conclusions.
ESG Strategist - The climate-nature nexus explained
Climate efforts that overlook nature could cause ecological damage, exacerbating negative climate feedback loops, and heightening the risk of irreversible environmental changes. As a result, the concept of a climate-nature nexus has been gaining increasing attention from researchers. In this note we assess different technologies eligible for financing under use-of-proceeds bonds, and compare them according to both their biodiversity risk and potential emissions reduction.