Background
We have recently noticed the trend in the market for some equity related transactions to be labeled green. This is an interesting development which we expect to continue.
Whilst there are no commonly accepted market principles to govern what we might call green equity there are an increasing number of references we can use for this debate.
In the below we look at these key references and provide our view on how green equity and related concepts may develop into the future.
Key Market References
We continue to see rapid growth in Sustainable Finance markets which primarily consist of bond and debt instruments.
These instruments are fundamentally different to equity given that they have fixed tenors and can be structured to be allocated to specific expenses and assets which are eligible as green assets.
On the other hand, equity is more permanent in nature and supports the overall operation and funding of a company.
Moreover, it is difficult to apply and allocate a portion of equity to specific expenses and assets which may be defined as green. This might necessitate different share classes or have other legal ramifications depending on legal jurisdiction.
Apart from this there is a lot more regulations and less flexibility on equity which has led to slow growth in labeling equity related transactions as green.
What has been done?
Let’s look at what has been transacted and labeled as green equity in the market.
The clearest case we have seen of a transaction being labeled as green is K2A. This was a property company located in the Nordics whose assets are all in green buildings.
Hence this is essentially a “Pure Play” green company which is not really a stretch to label as green equity because the company is already all green. In this case this is quite straightforward and understandable.
The more interesting part of the market is to consider when a company is not a Pure Play and only has a portion of its assets and balance sheet in eligible green assets.
Key Market References
We recently have noted an interesting market development whereby NASDAQ Nordics launched an initiative for green equity.
This exchange launched two designations:
- Nasdaq Green Equity Designation; and
- Nasdaq Green Equity Transition Designation.
Overall, the rules that govern these designations are related to how far the company’s asset and revenue is aligned EU Sustainable Finance Taxonomy.
There are different thresholds in place for turnover and assets that meet the criteria for either green or green transition equity.
Since the NASDAQ Nordics launched this initiative, we believe there is four to five other Nordic based companies that have met these requirements connected to their recent equity raising transactions.
This is a very interesting development although we don’t wish to see too many exchanges have different and varying levels of rules. As this could stunt and splinter the market at a very early stage.
Future Developments
What we do expect to see is more transactions such as AllBirds who produce eco-friendly shoes recently IPO-ed in a so called “Sustainable” equity format.
Sustainalytics provided an ESG risk rating report to support the transaction and ISS provided a second party opinion to state the transaction and IPO met the requirements of the Sustainability Principles and Objectives Framework developed by an Advisory Council (Canada) designed to cover a designation of Sustainable companies.
It will be interesting to see how this transaction was received longer term and whether there will be other companies that follow in their footsteps.
We hope that green equity doesn’t become 50 Shades of green and that the market figures out and designs away to allow companies to consistently label part or all of their equity as green or sustainable.
Given the nature of equity we believe there will be more innovation opportunities around labelling equity sustainable rather than strictly green which has a much narrower definition and application.
Tags: equity, green Last modified: January 1, 2022
