29 June 2018
“What we are proposing to do in the G20 project regarding sustainable securitization is nothing short of revolutionary and has the potential to move the needle in both speed and scale like nothing seen to date.”
ESG tools and analytics have always had a component of legal risk embedded in them. Poor ESG performance in the face of increasing regulatory scrutiny on environmental or social issues implies increasing risk. Conversely, strong ESG performance can connote investor and growth opportunity, as well as reputational and competitive upside. In this second of several pieces on lawyers using ESG tools, we hear from Mindy Hauman, Counsel at White & Case, on the growing importance of ESG for clients seeking to become a part of the sustainable finance mega-trend. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: Could you give us a little historical background on how you became so involved in ESG-related matters for White & Case?
Mindy: I have always been interested in trying to use my involvement in law for good but until green and sustainable finance came along, there were not many obvious synergies where capital markets lawyers could contribute in a meaningful way. When ESG finance was in its early stages, I saw a real opportunity to use my skill set and all the experience I gained in years of practice to make a tangible positive difference and that recharged my career and gave me a new challenge.
My first experience in ESG finance was working on the team that put together a first of its kind ESG bond to fund malaria prevention in Sub-Saharan Africa using an initial donor structure which later shifted to a self-financing vehicle. We knew we were doing something special with that deal, not only something we could be proud of and that made a tangible positive difference in people’s lives, but the structure and finance techniques could be replicated to provide mainstream capital markets finance for other such ESG projects.
That was one of the turning points for me. Now with the growing number of groups advocating/facilitating ESG finance through the global capital markets such as the Green Bond Principals (GBP), the CBI, the EU Commission and the G20 Sustainable Finance Working Group, together with the commitments set in the Paris Agreement on Climate Change, it has become even easier for a capital markets lawyer to get involved in ESG work. Such is the nature of capital markets work, the message has always been that ESG must work commercially. So, the challenge is to do good, make the world a better place but also make it pay its own way.
Making ESG projects pay for themselves has been one of the most powerful ways of converting sceptics. Those converted to the importance of ESG finance are easy to engage; the zealots are great helpers in evangelizing the message; the sceptics can be tougher nuts to crack. But, I enjoy that challenge. I like walking into a room full of hardened structured finance moneymen and women and convincing them that ESG can make them money and do good at the same time. As ESG finance becomes more mainstream, the business case is becoming easier and easier to make.
Tim: I learned about your work from the Bank of England. What kind of work are you doing with them?
Mindy: In April 2016, I was contacted by ICMA and the Bank of England (in their capacity as member of the Financial Stability Board (FSB)), advising the G20 Green Finance Study Group (G20 Group) which at that time was chaired by the People’s Bank of China and the Bank of England to advise the UNEP. White & Case were brought on to advise this G20 group on drafting a Green Bonds ‘template’ in a bid to bring some standardization to the Green Bonds market in line with the G20 push for standardizing the GBP and Green Bonds market. White & Case was given the opportunity to apply our Green Bond experience to the challenges faced by the global community to ensure that the Green Bond Principles remain practical and globally consistent with the G20 Green Finance Study Group’s plan to promote effective financial instruments to enhance climate finance and stimulate climate-friendly private investments.
This March I was contacted by the same team at the Bank of England to work on a new project for the same G20 Group. This time it was utilizing my structured finance experience along with the green/sustainable credentials. The aim is to introduce scale and speed to sustainable finance through traditional structured finance methods especially in the CLO and RMBS markets with the aim of exponentially moving the sustainable needle faster by giving those markets and governments (who have need for large scale project financing) the tools and finance infrastructure to make that happen. Just to focus on scale – we know that US$90tn more in sustainable investment is needed to develop global sustainable infrastructure alone in the next 15 years.
Tim: How do you describe the benefits to clients of using green finance?
Mindy: Green finance may be used to raise funds for new and existing projects with environmental benefits. They are similar to ‘plain vanilla’ corporate finance with the difference essentially being a defined “use of proceeds” for specific green projects. From a credit perspective, most green financings are indistinguishable from other conventional financing methods. Operationally, green finance largely functions the same as conventional debt financing. They are risk-weighted and credit rated in the usual way, based on the creditworthiness of the issuer/borrower, and they are generally traded and regulated in the same way as other conventional financings in the international markets. Issuers/borrowers and dealers/managers expect pricing and transaction costs to be similar to the issuer/borrower’s regular corporate financings (i.e. there is no expectation of a premium (or rather, a ‘greenium’)).
However, there are a number of advantages to issuing a green finance. From the issuer’s/borrower’s perspective, a green bond/loan results in the diversification of its investor pool (e.g., greater numbers of asset managers and insurance or pension funds), and contributes to ‘green’ investor relations and corporate social responsibility initiatives. From a dealer/manager’s perspective, green bonds/loans can be marketed as premium products to their clients as many investors are increasingly required to invest in such products in order to meet sustainability guidelines or criteria in their investment strategies. These parties should not underestimate current market trends and investor activism. We are fast moving to a position where investors expect their investments to have some form of ESG element – or they will ask “why not”? Already one of the byproducts of the GBP moving into mainstream is that bond investors are asking to have more detail on the use of proceeds whether it’s a green bond or not.
Tim: Is there a cost to clients for using green finance over non-green?
Mindy: Yes and no. As described above there is no data to prove a concrete greenium or pricing advantage (yet). However, unless the issuer/borrower already is set up to do so, they may need to do some work (at a nominal cost) to organize their internal structures, accounting and accounts set up in order to provide for the extra transparency and visibility required in order to demonstrate green use of proceeds. Many issuers/borrowers or deal structures are already set up (or it would not take much to make it happen) but where there is not that internal structure, there may be a one –off set-up cost. None of the issuers I’ve talked to have ever found this to be prohibitive or difficult.
The advantages often outweigh the expense such as over subscription and investor diversity and there are some jurisdictions where real incentives or cost savings are offered for green/ESG finance.
Tim: How is the green-ness of finance measured?
Mindy: As a practical matter green-ness is measured by the reporting method chosen by the issuer/borrower.
If it is a deal based on the GBP, the green use of proceeds in the finance document continues to be reported at least annually. Further analysis or information is provided by second party opinions.
If the Climate Bond Initiative (the CBI) is the reference, then it is the CBI’s criteria and taxonomy that determines the green-ness. If it is an Index such as the S&P sustainability index then it is whether the product meets the criteria to become admitted to the index.
There is no set definition of green, but that allows for the flexibility of financing structures and entities. It would be difficult to find a ‘one size fits all’ criteria across the pantheon of project bonds, RMBS securitization, synthetic derivatives and private green loan without unnecessarily over engineering it. The way it stands now, green-ness is determined by the investor – and that isn’t necessarily a bad thing. One fund might decide they only want to invest in pure play 100 percent green (including the supply chain) financing deals – it is up to them to satisfy themselves that it is green enough for their internal criteria. A different investor might not have such a strict criteria and it may be their investment goal is to empower some industry to switch from brown or start moving their business toward green and ESG – and that promise or undertaking is enough for the investor. Having green/ESG taxononmies within asset classes/product types will enable investors to compare similar products but the end decision will remain with the investor.
Tim: Could measurement be improved?
Mindy: There are some very good and very deep taxonomies and indexes out there but the comparability within asset classes and types could improve. This has been mentioned as one of the goals both at the EU level and in the G20 working group as a key to scaling up and unlocking the green structured space especially.
How fast is the White & Case ESG-practice growing?
ESG is hardwired into every W&C employee. W&C has a long tradition of ESG pro bono work and have assisted globally known ‘household names’ and many other ESG partners on ESG projects over many years. Each lawyer at W&C are required to do a minimum of 20 hours pro bono work per year but are encouraged to do more than that. For example, aside from my ‘day job’ and the sustainable finance work I do as part of it, I am also currently leading two pro bono projects to provide ESG financing for development projects run by different NGOs/non-profits.
W&C has dedicated full time pro bono managers who facilitate and mobilize lawyers across the global network to work together on projects. There is a central way to track, bid and distribute pro bono projects – pro bono ESG has the same infrastructure and support that a corporate client project receives.
Participation in ESG has increased year on year and the number of staff working on any number of ESG projects full or part time has increased year on year as well. This is something that from the managing partner down through the ranks is fully ingrained in the firm’s culture. This increasing competency on ESG issues and culture is positioning the firm to continue to expand its fee-earning ESG practice.
Tim: More broadly, how can lawyers help move the needle in a way which is additive to what investors are already doing on sustainability and the sustainable development goals?
Mindy: What I have seen first-hand from being involved in the ESG transactions I’ve done, the GBP working groups and the G20 work is that lawyers are the path finders. We find a way to turn an idea or proposal into a structure that is robust and works on a regulatory, legal and commercial basis – those three basic elements have to work in order for a sustainable financing to be deemed a success. Because we are always borrowing from one idea or one structure to see if it will work in an entirely different context, we are able to see possibilities, make novel connections and engineer them to become a reality. For example, what we are proposing to do in the G20 project regarding sustainable securitization is nothing short of revolutionary and has the potential to move the needle in both speed and scale like nothing seen to date.
Tim: How would lawyers engaging in sustainability help make the world more prosperous and resilient?
Mindy: Lawyers are natural advocates – it is what they do. They are also adept at breaking complex ideas/problems down and explaining them in an accessible way. I have seen the great work the W&C lawyers do when they collaborate on the ESG pro bono projects the firm undertakes and I have seen the good that lawyers and legal groups do worldwide. We are problem solvers, collaborators and advocates and have the necessary skills to help affect real and sustainable change in this sector.