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ABN AMRO fixed income - when US recession fears ebb, credit spreads will make a comeback
In this comment we analyze the sell-off in various spread sensitive European fixed income markets. European credit bond markets were obviously not immune to Monday’s market turmoil and the key gauges for synthetic credit spreads moved sharply, with 5y CDS spreads on the Itraxx main and cross-over widening by 5bp and 35bp respectively since Friday. Swap spreads and semi-core / peripheral country spreads reached levels seen during the French snap election. One could perhaps argue thin holiday liquidity as the key culprit behind the sharp moves. Looking back at summer months (July and August) over nearly 25 years, 16bp of widening in spreads on the broad corporate debt index actually looks reasonable in comparison to the spread widening during 2018 and 2019 for example. Actually, the absolute level of spread widening today is not meaningfully different than to 2018 when there were fears about too much central bank policy tightening as well.
ESG opinions are affecting the shape of bank spread curves
When bank bond issuers face ESG risks such as climate change, this should be translated in the market through significant pick-up on longer maturities. Based on that, we use the ValueCo ESG opinions to assess where banks stand with regards to such risks. Our analysis indeed reveals a relation between such opinions and the steepness in the curve, but that relationship is more clear when we purely focus on the environmental part of such opinion.
SustainaWeekly - A more gloomy outlook for EU spending towards climate next year
The political landscape is changing in Europe. Political discussions have now turned to fiscal tightening, which signals lower government spending in the coming years and thus, likely to impact green investments in turn. At the same time, the recent and future upcoming political elections do not point towards positive development in this field. We therefore expect ESG EU sovereign bond supply to stall in the coming years, as we discuss in our first piece. We then move on to assess how ESG opinions are affecting the shape of bank spread curves in the senior non-preferred space. Lastly, we continue with our series of deep dives into carbon capture and storage by focusing now on how to store the captured CO2. This is the last SustainaWeekly of this year. We would like to wish you great days ahead and a happy New Year.
SustainaWeekly - Acute physical risks have larger impact in the new NGFS scenarios
In November, the fourth vintage Network for Greening Financial Services (NGFS) climate scenarios were published. In this week’s SustainaWeekly, we compare these scenarios to the previous set. Orderly scenarios now include disorderly elements. New scenarios communicate the risks of lack of coordination, and role of behaviour adaptation. Acute physical risk estimates are larger and more granular. In our next note, we turn to the revised and recast Energy Performance of Buildings Directive (EPBD) to evaluate the potential impact it can have in the European building sector and more specifically, for green bond issuers. Our final note continues where our carbon capture note in the SustainaWeekly of 20 November left off: how to transport the captured CO2.
Climate ambition set to weaken under a new Dutch government
Following the Dutch elections, a right-wing coalition is most likely. Based on the party programmes, it seems likely that climate ambitions will be watered down significantly. There is quite some overlap in the manifestos on stepping up nuclear power, continued use of natural gas and a slowdown of the renewable roll-out, while the PVV wants to scrap earlier agreed upon carbon reduction commitments completely.
SustainaWeekly - Will this COP be any different?
The 28th Conference of Parties (COP) to the UN Framework Convention on Climate Change (UNFCCC) kicks-off at the end of this month. In this week’s SustainaWeekly, we preview the key issues that the conference needs to tackle, given that the world is not on track to meet the goals of the Paris Agreement. In our next note, we turn to the impact of the recent Dutch elections. We summarize the key climate and energy plans in the election manifestos of the parties that could form a right-wing coalition together with the PVV to assess the impact on climate policy. Our final note highlights the various obstacles facing investments in renewables. We shine a light on the potential implications of the combination of policies and bottlenecks and conclude with recommendations to solve these problems.
SustainaWeekly - Energy improvements can alleviate the pain for Dutch landlords
Rental prices for housing in the unregulated sector have risen dramatically in recent years, specifically in the major Dutch cities. The now outgoing minister of public housing has had a law in the works for some time, called the Affordable Rent Act, which includes a rent ceiling for what today still qualifies as unregulated rentals. In this week’s SustainaWeekly, we outline the consequences for housing investors of the potential law, by assuming a theoretical investment with energy renovation based on a property that would fall into the regulated segment based on the proposed law. Our next note covers the main aspects of EU-ETS II such as the phase in process, associated mechanisms, and potential dynamics and impacts. In our final note, we focus on report from the European Banking Authority (EBA) about the appropriateness and feasibility of including ESG factors in the current prudential framework, and the Pillar 1 Framework in particular.
SustainaWeekly - Shinning a light on battery technologies
In a world where renewable power becomes dominant, a way to store energy is crucial. In this week’s SustainaWeekly we shine the spotlight on battery technologies, not only existing ones, but also emerging technologies. We focus on the pros and cons of the various technologies. In a separate note, we go on to look at the issue of ESG data disclosures from the issuers of sustainable covered bonds. In our final note, we look at the issuance of sustainability-linked bonds so far this year, as well as recent demand and pricing dynamics.
SustainaWeekly -Will SMEs hamper the transition to Net Zero?
The EU Corporate and Sustainable Reporting Directive (CSRD) requires businesses to regularly disclose information on their societal and environmental impact and the sustainability risks they are exposed to. SMEs will largely not be covered. In the first note of this SustainaWeekly, we assess whether the exemption of SMEs from climate regulation more generally will hamper the transition to Net Zero. In a separate note, we go on to focus on the impact of the watered down German heating law on residential real estate bond issuers. Finally, we provide an analysis of the climate policies of the outgoing Dutch cabinet’s 2024 Budget Memorandum and the impact on sectors.
There is value in UK home energy efficiency renovation
The UK residential building space has significant energy renovation requirements. The valuation uplift from improving the energy efficiency, measured by means of the EPC, seems less pronounced for UK properties. Still, the high savings on energy cost from renovation still make such renovations attractive, despite the lack of subsidies and a high financing rate.