Bankable Insights – Credit Markets Edition II_October 2021
Bankable Insights – Credit Markets: A collection of the latest insights and perspectives on topics of relevance to the Credit Markets industry
*Bankable Insights* Credit Markets
Edition II
Financing net zero goals
October 2021
Dear clients,
As we enter the last quarter of 2021 and I reflect on the year, I am excited for the final quarter. Whilst an uneven progress of vaccinations is not only contributing to the divergence of growth paths in Asia – where I am based – and around the world, we are on positive trajectory. Challenges remain, but many more can now see friends and family, and of course also clients.
When I look at what we have accomplished in partnership with our clients – those very people we have not been able to interact with face to face for almost two years now – I am delighted. I am delighted about the progress we have made in accelerating the path to net zero, and the role finance and investments have played in this endeavour; I am delighted to see India, the Middle East and North Africa at the forefront of renewable energy development and am impressed by how companies, development banks, multilaterals and export agencies have come together to attract private capital; and I am delighted about the product innovation across a number of areas, for example the structuring of sustainability-linked loans that will support decarbonisation efforts in the maritime industry.
In this second edition of Bankable Insights for Credit Markets we are celebrating this continuous progress. We have collated a number of articles, videos and client case studies that speak to the tremendous effort that has gone and is going into channelling capital to where it matters most. These stories, this positive momentum brings a certain spring back into my step because they are testament to how much can be accomplished when we put our minds and hearts into it.
Crises tend to give rise to remarkable innovations. One of these has been the acceleration of ESG since the pandemic started. This will continue for years to come. A big thank you to all of you who have partnered with us to make a difference and continue to inspire us to do better.
Henrik Raber
Global Head Credit Markets,
Standard Chartered
Accelerating the path to net zero – the crucial role of finance and investment
Accelerating the path to net zero – the crucial role of finance and investment
As businesses and entire industries completely retool and refocus their priorities to achieve net zero targets, they must also look for ways to fund their transition.
Business and world leaders are aligned on the need to move to net zero, with thousands of large corporations setting ambitious goals to reduce emissions and bolster sustainability.
And with wind, solar, electric vehicles and hydrogen being embraced on a grand scale, a renewable future seems well underway. Technology is already a critical enabler, helping to track and measure emissions as well as providing new ways to reduce them. Even so, more needs to be done and faster, with better collaboration and fast-tracking of financing opportunities to push businesses toward their targets. New initiatives like the Climate Impact X1, a global exchange for high-quality carbon credits can help make essential financial strides.
The transition to net zero requires vast amounts of capital, and the financial sector must play a leading role to make sure companies can transition, and those that are already transitioning have the support they need to flourish.
Chris Leeds
Executive Director, Head of Carbon Markets Development, Standard Chartered
Collaborating for success
Moving forward, working together will be central to making the deep transitions that cut across the whole economy. While at least one-fifth of the world’s 2,000 largest public companies have net zero commitments, these pledges vary hugely in their quality, according to a report from the Energy and Climate Intelligence Unit and the University of Oxford2. Around 20 per cent of existing net zero targets already meet a minimum set of robustness criteria, or ‘starting line’ as set out by the UN Race to Zero Campaign, leaving major work to be done by governments and business leaders, the report found.
The essential components of a corporate climate action plan should include short-term targets as well as long terms absolute goals; average absolute emissions need to fall at a rate of 7-8% pa to halve emissions by 2030. Fossil fuel use should be phased out as quickly as possible and executive compensation, independent auditing of emissions and annual performance reporting to shareholders should all be used to ensure delivery.
Cooperation between governments, banks and investors is also key to the transition, particularly for countries that may struggle to attract investment. The hope is that developing countries in Africa and South Asia are able to leapfrog stages of technology development and harness their solar and wind potential.
New levels of public-private partnership will also be required to boost financial flows to developing countries, as well as collaboration between development banks, international investors and the governments of the countries.
Each country needs to develop its own strategy toward net zero, according to a special report by the International Energy Agency3 (IEA), taking into account its own circumstances and stage of economic development. Developed countries such as those in the EU and the USA have committed to be net zero by 2050, whereas others such as China and Indonesia have committed to be net zero by 2060.
Technology is another piece of the puzzle. Much of what’s needed to help reduce emissions already exists and while there are some gaps, entrepreneurs and innovators are working hard to fill them.
Even so, the scale of the effort needs to increase and the speed needs to quicken, the IEA says, which calls for the immediate and massive deployment of all available clean and efficient energy technologies, combined with a major global push to accelerate innovation.
Many of the tools that can affect change already exist and are improving. For example, solar panel efficiency has improved dramatically, with the latest technology more than 40 per cent efficient4, up from around 30 per cent in 2016 and around 20 per cent in 2012. Batteries are also developing rapidly, making them an increasingly economic source of propulsion for vehicles and a viable energy storage facility to protect energy supply from volatile renewable sources.
China is investing heavily in green technology, and is making huge strides in many areas, including battery storage5. We need to embrace and allocate critical capital toward developing new technologies like low-carbon fuels for heavy transport, low-carbon steel and cement, and better carbon removal technologies. If we don’t start financing innovation now, it will be impossible to reach our decarbonisation goals before we run out of time.
Work is needed to identify the promising new green technologies that could benefit most from significant investment, and to create more innovative financing programs that can generate the levels of investment needed to scale those technologies.
At the same time, there’s a revolution in food and agriculture, with vertical farming, regenerative agriculture and an increase in plant-based foods all contributing to lower emissions. Investment into plant-based foods6 reached about USD1.7bn in 2020, up nearly three times compared with 2019, according to research firm PitchBook.
Financial players like banks, asset managers and investors are crucial to unlocking the funding businesses need to transition to net zero. They can provide finance and risk management solutions that enable companies to make changes to their business models and operations to align with the transition, and investment for green businesses and technologies contributing to the transition.
For companies that are unable to reduce emissions as quickly as they would like, or cannot ever fully eliminate their emissions, purchasing carbon credits to compensate for the greenhouse gases they’re releasing into the atmosphere can offer a critical pathway to net zero.
At the moment, high-quality carbon credits are scarce and a report by McKinsey found that the market is characterised by low liquidity7, scant financing, inadequate risk-management services and limited data availability. The Taskforce for Scaling the Voluntary Carbon Markets (TSVCM)8, chaired by Standard Chartered’s CEO Bill Winters, has committed to resolve these issues and develop high quality carbon credits that follow a set of Core Carbon Principles (CCPs). Climate Impact X, a joint venture from DBS Group, Standard Chartered, Temasek and Singapore Exchange, seeks to support this work by listing contracts in line with the recommendations of the TSVCM that increase transparency, boost liquidity and give a viable option in the voluntary market.
Demand for carbon credits is likely to increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050, the McKinsey report found, putting the total market value at more than USD50bn in 2030.
Measurement and transparency
As investor interest continues to increase, so too will the need for demonstration of results and measurement. That means bringing data to the fore and making information about progress, projects, and technologies more widely available and more transparent.
Setting targets can accelerate progress. Companies with science-based targets9 have reduced their combined emissions by a quarter since 2015, compared with an increase of more than 3 per cent in global emissions from energy and industrial processes over the same period.
Demonstrating a strong commitment with a concrete plan for getting there and interim targets can also help attract international investors. Markets are providing the financing to help companies and institutions achieve their sustainability aims.
Net zero is a big ask: entire industries will have to completely retool and refocus their priorities. While many are progressing well with their transition, reaching even the most moderate targets requires an unprecedented global cooperative effort from governments, technology and financial markets.
The future is coming faster than we think. Standard Chartered is going to be there every step of the way with our clients to provide the appropriate capital to support them as their industries transition and decarbonise.
Chris Leeds
Executive Director, Head of Carbon Markets Development, Standard Chartered
Capturing opportunities in the race for renewable energy in MENA
Capturing opportunities in the race for renewable energy in MENA
Here’s how collaboration and innovative financing can supercharge MENA’s renewable energy ambitions.
Blessed with abundant renewable resources, the Middle East and North Africa is at the forefront of green energy development and has been moving away from hydrocarbon reliance for more than a decade.
Now, as technology enables the capture of ever-greater quantities of energy from solar, wind and water systems, this region and its developers are offering increasingly compelling investment opportunities.
More renewable projects are needed to meet the ambitious targets set by countries in the region, which amount to 80 GW of renewable capacity by 20301, according to the International Renewable Energy Agency, that’s up from around 28 GW now, and implies billions of dollars of investment over the coming years.
The region is well positioned for success, benefitting from land availability, plentiful sunshine and high wind speeds in some geographies, low capital and labour costs and a good track record of delivering return on investment. Solar and wind projects are proliferating, offering investor potential, while new opportunities are emerging in green hydrogen and waste-to-energy projects.
The region’s energy sector also remains attractive to foreign and local investors, because of a favourable global business environment and proactive sustainable and environment regulatory changes. However, financing these capital- intensive projects is still a challenge.
It’s important not to underestimate the scale of the challenge and the total investment needed. Meeting the targets will require the establishment of policy2, regulatory, technical and economic frameworks that can enable the scaled-up deployment of renewables, IRENA says.
Approximately USD35 billion of investment in renewables3 will be needed across the region to meet committed projects over the next five years, says Abbas Husain, Managing Director, Project & Export Finance at Standard Chartered. While some areas like the Gulf Cooperation Council countries are attracting finance, it will also be important to facilitate funding to countries like Egypt, Iraq, and Nigeria.
The region has the key ingredients. Working to attract private capital is very important to accelerate renewable deployment and embrace the energy transition. It’s important for companies, development banks, multilaterals and export agencies to come together.
Abbas Husain
Managing Director of Project & Export Finance, Standard Chartered
Obtaining finance is critical for developers to do more in this region and for transforming opportunities into action. Within this, collaboration is key and public–private partnerships have a crucial role to play.
Moreover, Islamic Finance which advocates financing and investing in real economy sectors to develop communities and societies could also play a major role in financing renewable energy projects. At the same time, it can create an opportunity for both governments and businesses to diversify their investment capital and provide a new asset class featuring a balanced risk-sharing element for issuers, and fixed-income returns for investors.
Helping the transition to net zero is a key pillar of Standard Chartered’s strategy, with a commitment to support up to USD35 billion of clean technology and renewable projects by the end of 2024. Activity so far underscores how keen investors are to be involved. Between January 2020 and the end of this year, Standard Chartered will have completed 10 power deals across MENA – eight of them for renewables.
Last year the bank was involved in the USD1 billion financing of the world’s largest solar project4 in Abu Dhabi, working with EDF Renewables and Jinko Power. Located in Al Dhafra, 35 kilometres south of Abu Dhabi City, the solar photovoltaic plant spans over 20 square kilometres of desert climate area and aims to provide the equivalent electricity to power more than 160,000 local households. Upon full commercial operation, the 2GW plant is expected to reduce Abu Dhabi’s CO2 emissions by more than 2.4 million metric tons per year, equivalent to removing approximately 470,000 cars from the road.
Hydrogen is also attracting investor interest as a major part of the future energy mix. Globally, the development of green hydrogen will require investment5 of around USD15 trillion between now and 2050, peaking in the late 2030s at around USD800 billion a year, according to the Energy Transitions Commission.
The MENA region already has many renewable-based green hydrogen projects poised for the coming years6, including a renewable ammonia project in Saudi Arabia and Oman’s Sohar port.
A joint venture between Air Products, ACWA Power and NEOM, gave rise to a USD5 billion deal for a green hydrogen-based ammonia production facility7 powered by renewable energy. The project is sited in NEOM, a new model for sustainable living located in the north west corner of Saudi Arabia and will produce green ammonia for export to global markets.
Waste to energy technologies8 are also ripe for investment and are garnering renewed focus. Countries including Saudi Arabia, UAE, Qatar, Bahrain, and Kuwait are among the world’s largest waste producers per capita and the region produces more than 150 million tons per year.
Such projects are hoped to deal with as much as 45 per cent of Dubai’s waste9. In 2021, Standard Chartered was part of a consortium of lenders to finance the USD1.2 billion Dubai Waste-to-Energy Project10, one of the largest waste-to-energy plants in the world.
While great strides are being made, and some finance is flowing, more needs to be done. For investors coming to the region, there are challenges in navigating the local jurisdictions, but these can be aided and overcome with public-private partnerships and local knowledge and networks. New regulations will be needed and government flexibility and intervention in preparing the legal framework for future developments.
Ambitious governmental targets are part of the solution, and with hydrogen, waste-generated energy and nuclear reaction being added to the mix, investors have multiple opportunities to invest in emerging technologies as well as more traditional ones like wind and solar.
There’s a huge amount of potential. Slowly and steadily we are seeing a rise in the involvement of private capital. The multilaterals, export credit agencies and bilaterals have sown the seeds and with strong partnerships more investment should flow.
Abbas Husain
Managing Director of Project & Export Finance,
Standard Chartered
Megadeals set to heat up M&A in Asia as China rebounds
Megadeals set to heat up M&A in Asia as China rebounds
Deal-making and M&A are surging as the ultra-low-yield economy bolsters confidence and appetite – especially in Asia.
Worldwide mergers and acquisitions (M&A) activity surged to USD1.3 trillion1 in the first quarter – the strongest opening period since records began and the second-largest quarter on record. That came hot on the heels of 2020, when the number of deals more than tripled to 255,2 and corporations accelerated their strategies to gain an advantage, grow more quickly or avoid distressed situations brought on by the pandemic.
At Standard Chartered, we expect this flurry of activity to continue, albeit perhaps with more of an emphasis on core businesses. As the global economy continues to recover from the impact of COVID-19, investors’ minds are focused on environmental, social and governance (ESG) factors, green finance, sustainable infrastructure and the transformational power of digitalisation. Against that backdrop, megadeals will continue to take centre stage.
Acquisition finance is in the midst of a boom that shows no signs of slowing down. Investors are growth-oriented and optimistic about the environment despite the difficulties we’ve all been through in the past 18 months. As the recovery continues, we expect the strength of activity to be sustained with companies looking to M&A to supercharge themselves for the next phase of growth.
David Law
Managing Director of Leveraged and Acquisition Finance,
Standard Chartered
Much M&A activity was put on hold as COVID-19 swept the globe in the first half of 2020. After new ways were found to do deals online, activity accelerated, not just as a way of unlocking growth, but also for survival, as the pandemic reshaped the ways we live and work and tore through many traditional business models.
Buying digital capabilities
Many companies were forced to swiftly pivot or adopt totally new ways of operating, fueling acquisitions of assets and businesses to support them. Activity is being bolstered further by the global economic recovery, with the US making a strong recovery, while China was among the first to emerge and its subsequent growth is proving a big draw.
It’s clear that acquisition finance will continue to be the hottest product in town and digital transformation is a key enabler. The technology that supports remote working, education, shopping and entertainment is now essential, rather than just nice to have.
The speed at which this is happening – fast-forwarded by the pandemic – means that many companies prefer to buy capabilities in, instead of growing them organically. Three-quarters of business leaders surveyed by PwC3 said they plan to allocate more resources to digitalisation and more than 50 per cent said they would allocate more to M&A activity to achieve their priorities.
Asia is at the forefront of the flurry, powered by the technology sector. M&A targeting technology companies have hit a record high in Asia Pacific, according to Dealogic data. Tech deals represented just under a third of the region’s M&A transactions4, reflecting a fundamental change in the way the economy works, as the trend toward online activities accelerates.
Asian tech deals lead the way
Grab Holdings, a large ride-hailing and food delivery firm in Southeast Asia, went public in April 20215, merging with a special purpose acquisition company. Shortly after that, Indonesia’s largest-ever deal6 took place as payments firm Gojek and e-commerce leader Tokopedia merged to create GoTo, a multi-billion dollar tech company spanning online shopping, courier services, ride hailing and food delivery services.
While the companies involved in those deals are focused on enabling the way we live and work now, data centres, the powerhouses of the digital economy, are also high on investor’s watch lists. They have been at the heart of many large deals, with Bain Capital buying into Chindata and the Real Assets consortium acquiring a majority stake in Australia’s AirTrunk.
Data centres and the new economy – high-growth industries that are embracing cutting-edge digital technology – will continue to be a focus for investors as they power M&A activity.
Alternative power sources also outperformed the broader deal-making space last year, according to international law firm White & Case, while PwC identifies the sector as one of its “M&A hotspots”.7
Sentiment remains buoyant
The acquisition boom isn’t playing out consistently across geographies and sectors, since investors are tailoring their strategies to the recovery and focusing on quality. In India, opportunities are fewer, and deal momentum has faltered as the country emerges from the world’s biggest and deadliest COVID-19 outbreak and struggles with its vaccine roll-out.
The spectre of rising inflation and interest rates also threatens to dampen enthusiasm. However, higher rates would be felt less acutely in Asia than in the West because buyouts are typically transacted at lower leverage levels. Overall, sentiment remains buoyant and dealmakers are loosening the shackles on their investment plans.
Financial sponsors and private market investors are riding trends that were already in train and that have been accelerated by the pandemic. This growth- and opportunity-oriented approach is set to remain, and we see deals continuing to be done all across Asia. M&A promises to continue its hot trajectory, with acquisition finance fueling deal activity as its capital motor.
David Law
Managing Director of Leveraged and Acquisition Finance,
Standard Chartered
India’s green opportunity
– why international finance is vital
India’s green opportunity –
why international finance is vital
Here’s how India’s renewables push is increasing demand for international financing.
India is going full throttle to meet its ambitious renewable energy targets, on the back of government and regulatory support, reduced credit risks and more mature bidding processes. However, if the country’s renewable ambitions are to be realised, the international financing community, and innovative instruments, will need to play an active role.
A decade ago, India’s renewables capacity stood at just over 10 gigawatts (GW). Today, it is more than nine times higher, contributing 10 per cent of the country’s energy mix. Capital has been central to unlocking these gains. Since 2014, more than USD70 billion has been invested in the country’s renewable energy sector, as India has a liberal foreign investment policy for renewables allowing 100% FDI through an automatic route.
Now policymakers want to significantly accelerate this transition, quadrupling capacity to 450 GW by 20301, creating 40 per cent of India’s electricity from non-fossil fuels by 20302. And while recent trends are encouraging, as much as half a trillion US dollars will be needed to make it happen3.
The local currency market will not itself be able to support the capital that is required to achieve some of these ambitious capacity targets. However, given the flurry of activity in the sector, we see a lot of options around the corner.
Prasad Hegde
Managing Director, Project & Export Finance,
Standard Chartered
Fortunately, interest is growing among international investors and the market is moving fast. In 2019, the first investment-grade bond in India’s renewable energy sector was launched, jointly coordinated by Standard Chartered4. Since then USD8 billion of capital has been raised in the bond markets to support the renewables rollout, and Standard Chartered expects these volumes to rise further.
Key market fundamentals support this outlook. Creditworthy renewable-power developers benefit from a robust bidding process. As one of the world’s largest renewable markets, investors in India’s renewables also have the comfort of scale.
Due to the relatively greater risks surrounding early-stage renewables, developers have traditionally needed to offer greater returns. This has fostered a breeding ground for financial innovation. Recent years have also seen the entry of new debt issuers and sponsors, as well as changes in debt structures, including five- to seven-year foreign currency mini-perms. These align the need for certainty in interest rates (which are fixed by executing cross currency swaps from USD to INR) among India’s developers with investor appetite for returns.
Risk appetites are also increasing. While some local currency lenders and multilaterals still prefer plain vanilla, 20-year amortising structures, lenders and sponsors in the dollar market are increasingly willing to explore balloon facilities including high-yield bonds and mini-perm loans5.
Construction finance is also attracting interest, the past 18 months having seen around USD2.5 billion of international bank liquidity raised for the sector. Standard Chartered recently led and structured a landmark USD1.35 billion construction financing deal in the renewable sector, which attracted significant participation from the international bank market and has opened the doors for sponsors.
The resulting inflows of capital from international investments and innovative instruments are positively impacting refinancing rates, strengthening the market, and ensuring it will play a critical role in the years ahead.
India’s need for global capital is well timed, and benefits from a supportive policy environment. Amid a low interest rate environment, India’s renewables offer 25-year power purchase agreements at scale secured by central government-owned sovereign counterparties6. It also comes as global investors are reaching for higher, greener returns, amid pressure on funds and companies to disclose their climate risks and net zero plans7. Indian renewables and innovative investments present a compelling package.
Yet India’s ambitions should be set in context. In the near term, coal will remain dominant in the country’s energy mix. Uncertainty also persists. Delays in tariff and power procurement approvals under the PPAs, evacuation bottlenecks and variations across states need to be addressed and streamlined. However, the government has approved legislation to address concerns and has committed to an environment in which contracts and investments are safeguarded8.
India is expected to see the largest increase in energy demand of any country over the next two decades, during which the International Energy Agency forecasts that solar power and coal could converge, each accounting for 30 per cent of energy generation by 20409.
Global investors will play a crucial role. International debt capital will remain extremely relevant for India’s renewables sector, especially given the overall capital requirement to meet the 450 GW target. The capacity targets are really ambitious. But where we are today, it makes me believe that the sector is on the right trajectory.
Prasad Hegde
Managing Director of Project & Export Finance,
Standard Chartered
How the Middle East is showing the way on
energy transition
How the Middle East is showing the way on energy transition
Financial instruments linked to sustainability goals are helping drive the Middle East’s energy transition.
The Middle East, long a byword for hydrocarbon production and wealth, has a key role to play in the global transition to a carbon-neutral future. Some of the economies built on extracting and processing fossil fuels have to transform by pivoting to renewables and other clean forms of energy, with companies and governments offering support and investment.
Government initiatives are bolstering the transition: the UAE Energy Plan for 2050 targets a mix of renewable, nuclear and clean energy sources and the Government aims to spend around USD160 billion to attain its goals. Saudi Arabia is also investing in becoming carbon neutral1 and wants to derive 100% of its energy consumption from renewables (including natural gas) as well as 50% of its production as part of its Vision 2030.
While both new and traditional industries in the region realise the imperative to change, every company is at a different point in their journey, but some businesses in the Middle East are leading the way.
These economies and their companies are adapting extremely swiftly and are ahead of many other regions in terms of the overall transition phase. We are seeing a lot of initiative from the governments of UAE and Saudi Arabia in supporting the energy transition, and some of their large companies in carbon-intensive sectors are already using innovative instruments to reduce or offset their emissions. This is a great opportunity for global investors to help the energy transition in the Middle East.
Hind Chawki
Managing Director, Head of Financial Markets MENAP, Standard Chartered
Often, the markets and sectors that require the most financing to achieve their goals are the ones left out of green finance because they are deemed too traditional.
Understanding the urgency
The Middle East’s transformations, partly driven by global initiatives to tackle climate change and greenhouse gas emissions, will be a litmus test of how well the world is set to meet broader sustainability targets. And they offer opportunities for investors willing to go along on the journey to a greener future.
Across the region, nations and companies are taking up the baton, understanding the urgency to transition2, the requirements from the international community and investors and the advantages of embracing the shift at a relatively early stage.
Investing in the future requires substantial capital, and this is evolving as the theme of transition moves up the agenda. While support and investor demand is there, there are also signs that more needs to be unlocked, with finance cited as a challenge by 80 per cent of executives in the region, in Standard Chartered’s Zeronomics survey, more than the global average of 67 per cent.
Transition financing for companies
To help accelerate the transition to net zero, Standard Chartered has made a commitment to financing in its Transition Finance Imperative, to help clients transition while addressing their specific challenges. It acknowledges the stage that oil and gas is at, and the need to act, while also recognising that the sector remains a critical enabler of economic development and employment.
Companies linked closely to the production or use of fossil fuels have started to embrace the change, assisted by innovative green capital-raising programmes. The United Arab Emirates’ national airline Etihad sold a USD600 million sustainability-linked sukuk3 – a sharia-compliant financial instrument similar to a bond – last year through Standard Chartered, the first-ever issuance of such a security.
An airline securing a loan hinged on a detailed international verification of its sustainability credentials and a link to the United Nations’ Sustainable Development Goals shows how far the region has come as a hub for sustainable expertise and financing.
Etihad is also the first airline in the Middle East to launch a self-funded carbon offset scheme, by signing up to the Carbon Offsetting Scheme for International Aviation (CORSIA).
Accelerating green finance
For companies that are further along the pathway, momentum is gathering, with green sukuks and other instruments attracting a wall of money. Green bonds are those that are used for environmental or climate-oriented projects. The market is expanding, having already grown4 to more than USD225 billion raised in 2019, from just USD 807 million in 2007.
Recent deals in the Middle East show very strong investor demand. Saudi Arabia witnessed a green financing first with the sale by Saudi Electricity Company5 of USD1.3 billion of Islamic bonds. Underscoring the strength of investor demand for such securities, the deal’s orderbook closed at USD 4.7 billion.
Standard Chartered was part of a group of banks that came together to finance a loan agreement for around USD900 million for Dubai Waste Management Company6 to build a waste-to-energy plant in Warsan.
And sovereigns are also getting into green finance, with Egypt pulling in orders7 for nearly five times the USD750 million size of the Middle East and North Africa’s first sovereign green bond.
Impetus is increasing yet more needs to be done
All this is just for starters. Across the region, solar, wind and nuclear energy projects are already underway.
But the changes aren’t just to the way companies finance their capital structures. Many have also put in place corporate8 policies and restructured their operations to meet the “G” part of the ESG equation – governance. Critical infrastructure such as port facilities are being built to the highest sustainability standards in the region. Developments in green hydrogen are also being considered as important accelerators for the region’s energy transition.
As the region prioritises energy transition, and with businesses and consumers more focused on ESG, an inclusive approach to energy policy and investment decisions is vital. This will help bring more sustainable financing from capital market investors and regional and global issuers, that can help to support the region to achieve its energy transition goals.
Case study: Sustainability-linked loan to CSSC
(Hong Kong) Shipping Company Limited
Case study: Sustainability-linked loan to CSSC
(Hong Kong) Shipping Company Limited
Find out how CSSC Shipping and Standard Chartered worked together on a 10 year-sustainability-linked loan that will specifically support CSSC’s decarbonisation efforts, as well as its strategic goals around sustainability.
CSSC (Hong Kong) Shipping Company is one of the world’s leading ship leasing businesses, and a member company of the China State Shipbuilding Corporation Limited. The company is working to reduce carbon emissions, in line with China’s 3060 pledge1.
As the global shipping industry is central to supply chains and trade, it has an important role to play in decarbonising shipping and meeting sustainability targets.
Therefore, CSSC approached Standard Chartered to work together on a sustainability-linked loan that could specifically support CSSC’s decarbonisation efforts, as well as CSSC’s own strategic goals around sustainability.
Standard Chartered executed a 10-year sustainability-linked loan that supports four container ships with a total loan value of USD96 million.
The transaction differs from traditional ship financing in several ways. Firstly, the loan aligns with the Sustainability Linked Loan Principles2 which have been developed to facilitate environmentally and socially sustainable economic growth.
Secondly, for the duration of the loan, the average efficiency ratio of the four ships will be evaluated and other sustainable indicators will be monitored.
This is both a first in the sustainable finance field for Standard Chartered within the shipping industry in Greater China and North Asia, as well as CSSC Leasing’s foray into sustainable financing.
Standard Chartered’s role
Standard Chartered acted as the Structure Coordinator and Mandated Lead Arranger for the loan.
In facilitating the loan, we were able to combine our extensive experience of serving the global shipping industry and our position as one of the world’s leading providers of sustainability-linked finance solutions.
Decarbonisation is crucial to the long-term development of the maritime sector and Standard Chartered is well positioned to provide customised sustainable finance solutions to assist the industry’s transition.
Standard Chartered is a signatory to the Poseidon Principles3, which establishes a framework for aligning financing for the shipping industry with climate and sustainability goals. A key target within the Poseidon Principles is to reduce the global shipping industry’s greenhouse gas emissions by at least 50 per cent by 2050.
How growth and innovation in credit insurance can unlock latent capital
How growth and innovation in credit insurance can unlock latent capital
Credit insurance is rapidly growing. Effective collaboration between banks, insurers, and reinsurers is channelling capital to developing-market projects.
Credit insurance, which protects financial institutions, or sellers of goods and services, against bad debt and is therefore used as an important risk management tool, is in an exciting growth phase. As a result of innovation and effective collaboration between banks, insurers, and reinsurers, much latent capital has been unlocked, allowing a range of developing-market projects to take off which might have otherwise been deemed as ‘too risky’.
So why is this tool not being used more broadly to channel funds to where they are most needed? The challenge lies in the market not being as well understood as it could be.
The non-payment insurance market for single risks is worth an estimated €2.2bn pa in premiums and growing, and is used to facilitate an estimated €600bn of lending to the real economy, according to ITFA1. The World Trade Organization reports2 that 80% to 90% of world trade is in some way reliant on trade finance and that the private credit insurance market plays a significant role in this.
1 International Trade and Forfeiting Association, survey May 2019
The market has really grown and become innovative over the past five years. There’s a real synergy between banks, clients, brokers, the insurers and reinsurers – it’s a fantastic piece of the credit market that could translate to channelling more capital to areas and projects that will benefit the most.
Gary Lowe
Managing Director and
Head of Global Credit Insurance Group,
Standard Chartered
Strong momentum and innovation
The growing appetite and momentum is encouraging. As a major supporter of the credit insurance market, Standard Chartered harnesses it to manage portfolio exposures, optimise capital and support clients in achieving their aims, while generating stable returns.
The market offers ways to provide credit support that mobilises a broad base of funding to support a pool of development projects, including those that support the United Nations’ Sustainable Development Goals. The 2008 global financial crisis made banks and other private institutions more cautious about lending to these projects, and that confidence has yet to fully recover. This is particularly true for larger-sized projects, according to the International Finance Corporation3.
Defusing the risks and matching appropriate risk levels to risk appetite using credit insurance as a risk mitigation tool, can help the private sector continue to accelerate capital toward these goals, something that’s taken on increasing importance as the world recovers from the COVID-19 pandemic and the gap between the ‘haves’ and ‘have nots’ has widened.
Higher yields are attracting institutional investors to emerging markets in Asia, The Middle East and Africa; this trend coupled with the market’s optimism towards continued global growth has been an important driver in keeping the credit insurance momentum going. And as the market grows, so too is product innovation and creativity – including derivative transactions, structural products that share risk, securitisation and increased collaboration with pension funds.
Other innovative structures include securities lending, loan repackaging, insuring loans to special purpose vehicles, financing projects that support environmental, social, and governance (ESG) goals, and innovative risk analytics models. These are all great examples of how collaboration, innovation, and creativity play an important role in driving positive change and channelling capital to where its impact is greatest.
Non-correlation adds attractive appeal
The non-correlated nature of credit insurance, or its ability to outperform the market when economic growth slows or not being impacted by an event that shakes the core insurance market such as natural catastrophe, makes its appeal even more attractive.
Credit insurance can generate a relatively stable return on capital even in turbulent times, with insurance companies viewed as safe havens, especially during volatile markets.
Standard Chartered’s outlook is positive, after it placed the most credit insurance product ever into the market in the first quarter of 2021. Going forward, the team is focused on deepening the market’s appetite for a broader range of bank originated credit assets.
It’s not just about the premiums coming in and the claims going out. It’s a broader financial ecosystem that rises and falls together, [it’s] about an ongoing relationship − and being there also if things don’t go according to plan. This is also at the heart of Standard Chartered’s brand promise: being here for good.
Gary Lowe
Managing Director and Head of
Global Credit Insurance Group,
Standard Chartered
The lure of real assets investments
The lure of real assets investments
Here’s how real asset investments are flourishing.
Alternative property and other real assets are surging in popularity after the COVID-19 pandemic created new headwinds and tailwinds across different asset classes, bolstering the returns on some while also reducing the risks.
The risk-return profile of traditional property types, including offices, apartments and retail, is linked to economic growth, but alternatives, like last-mile logistics facilities, data centres and multi-family rental properties are bucking that trend. That has propelled real assets into the mainstream, as increasing funds flow into infrastructure and large-scale developments. The momentum will build further as governments around the world step up their spending in a bid to kick start their economies. With an estimated USD15 trillion of projects needed around the world, Asia is set to become a hub for these financing structures.
In a low interest rate environment, real assets have been providing institutional investors with new ways to earn returns and also to preserve their capital. Since they generate predictable cash flows and offer a way to protect against inflation, these assets are increasing in stature and value during the pandemic. Now investors are looking for broader diversification across different real asset sectors which will deliver attractive risk-adjusted returns in the future.
Swati Roy
Managing Director of Financing Solutions,
Standard Chartered
As COVID-19 accelerated the shift to digital living and working, it also brought logistics and data centres to the fore. Multi-family rental properties and other property assets also grew in popularity.
While already a trend underway, data-centre construction exploded as more and more digital services moved to the cloud. Broadband network use increased to facilitate the move from office to home working, and e-commerce and streaming media services boomed.
Against this background, VIRTUS Data Centres, part of ST Telemedia Global Data Centres, has expanded its UK data centre facilities,1 and its parent group now has more than 120 data centres with over 1.4GW of IT load across five geographies. Demand for such services is set to expand, with professional-services firm JLL forecasting that data-centre construction deals in 20212 will exceed last year’s record of 80 megawatts of capacity.
Another trend accelerated by COVID-19 is the move to logistics. Shopping habits were shifting to online well before the pandemic set in, adding to the need for storage space and logistics. With this in mind, investment firm Blackstone began acquiring assets in North America, Europe and Asia in 2010 and now has nearly 1 billion square feet of logistics space3 around the world.
Financing real asset deals
Recognising the trends that are set to continue, banks as well as public and private equity markets are stepping up their support, enabled by low borrowing costs. Institutions, with investment coffers swollen by surging asset valuations and record government stimulus, are allocating capital into the space, while asset managers have been putting together real-asset debt funds.
The transformation of the sector has not only lifted the quality of lenders and borrowers making deals, but also the sophistication of the financing structures.
At Standard Chartered, we’ve seen the adoption of new capital structures and terms, including unitranche debt – hybrid loan structures that combine senior and subordinated debt into one instrument – and term-A loans – senior-term loans that usually mature within five to six years.
The range of funding options is set to keep growing, with innovative and different capital and security structures appealing to investors across the board. Asia, particularly China, is going to play a significant role in the developing sector.
Transitioning to a green future
No discussion of infrastructure financing would be complete without considering environmental, social, and governance (ESG) factors and safeguards, and in this regard the real asset sector has work to do.
The real estate sector has a high carbon footprint, contributing around 30 per cent of global annual greenhouse gas emissions, according to the UN Environmental Programme.4 Data centres amount to around 1 per cent of global electricity demand,5 and their rapid growth means the proportion could grow to between 15 and 30 per cent in some countries by 2030, according to Imperial College London.
While these figures are undoubtedly high, the companies involved are taking action and data centres already aggregate computing power, making them more efficient than a disbursed network. Singapore-based ST Telemedia Global Data Centres says its data centres will be carbon neutral6 by 2030.
Banks are also helping to facilitate change, by funding green-led initiatives and by combining real asset and power projects together, offering investors the chance to capitalise on the trend toward real assets and green finance at the same time.
Global investors managing almost USD7 trillion are planning to double their spending on renewable energy infrastructure7 over the next five years, as they seek to capitalise on the opportunities that are emerging.
Harnessing capital for good
And ESG goes beyond power, to areas where real asset financing can make a difference.
By funding affordable housing, Blackstone is helping to address a significant undersupply of homes8 across the globe. New housing construction has declined in the US and Spain, and in England the supply of housing is around 50 per cent lower than it needs to be. The company’s investment in the sector adds thousands of multi-family, affordable and rental homes, helping to address a critical social need while also delivering strong returns.
ESG and sustainability is critical from a social perspective – it is the right thing to do – but it also makes investment sense. Institutional investors can play a critical role in this, given their large pools of long-term capital, and we know that private investment is vital to bridge the infrastructure investment gap.
Swati Roy
Managing Director of Financing Solutions,
Standard Chartered
