Vinson & Elkins Report Outlines Trends and Opportunities for Debt Issuances within the Accelerated Growth of Sustainable Finance

The report draws on the market insights of experienced Vinson & Elkins attorneys with extensive knowledge of Green Bonds, Green Loans, and other activity-based and behavior-based sustainability linked debt instruments. Highlights and key considerations from the report include the following:

• Currently, no global consensus exists on how to classify projects qualifying for green financing; however, the Green Bond Principles (GBP) provide a non-exhaustive list of eligible green categories. While the GBP and Green Loan Principles (GLP) are the main principles guiding the green debt markets, other organizations have developed and are in the process of developing their own methods for evaluating the “greenness” of a debt instrument, including the Climate Bonds Initiative (CBI).
• Since determining whether a bond is ‘green’ depends on the eligibility of the project to which it relates, not the eligibility of an issuer, companies across varying industries can participate in the green bond market if the use of proceeds meets certain eligibility criteria. In 2021, investments in the energy sector made up roughly a third (35%) of all green uses of proceeds, followed by low carbon buildings (30%), and green transportation (18%).
• Sustainable finance is not limited to only environmental matters, and there is a growing market for Social Bonds and Social Loans. Funds targeting unemployment, Covid-19 and other initiatives to improve the lives of a target population are expanding in use. The market will continue to evolve in the coming years and look for guidance from Social Bond Principles (SBP).
• Sustainability-linked debt: sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs) are providing more companies with the ability to create additional shareholder value and tap into the growing sustainable finance market. The use-of-proceeds flexibility in these instruments provides new opportunities for companies to demonstrate their ESG credentials.
• The European Union (EU) has taken notable steps to create a cohesive path forward for sustainable financing. The EU Taxonomy Regulation sets out a framework establishing a minimum criteria for an investment to qualify as ‘environmentally sustainable’. These regulations may have implications for U.S. companies if European market participants begin seeking corresponding reporting and disclosures from U.S. company investments and/or shift their investment to companies that provide such disclosures.

“Our clients are increasingly looking at financing with sustainability in mind, and in doing so they are creating more opportunities to access capital on more favorable terms by using available sustainable finance tools,” said Sarah Morgan, partner, Vinson & Elkins. “Sustainable debt instruments benefit companies, investors and lenders in a myriad of ways, such as attracting new market participants and using the flexibility in these instruments to finance new projects.”

“As availability of ‘green investments’ and ‘green finance’ increases in a variety of forms across a growing number of sectors, these instruments will garner more attention from regulators,” said Caitlin Snelson, senior associate, Vinson & Elkins. “Working closely with clients we are helping them understand the need for increased compliance with benchmarks and guidelines. Sustainable finance rules are increasing, and navigating this evolving regulatory landscape is where we help drive value.”

For more insights and to read the full report click here.