To celebrate ‘Sustainable September,’ we are sharing with you ‘The Path to Sustainability’, a four-part article series which examines the key elements that underpin the development of the sustainable finance market: collaboration, inclusion and innovation. This article is the third piece of The Path to Sustainability series.

The explosion in investor demand for securities such as Green Bonds shows that the capital markets are more than willing to provide sustainable finance. This is especially true where the use of proceeds is seen to have a clear and demonstrable positive impact, especially on the environment or carbon transition.  

But this is not so easy for all issuers. Indeed, as we highlighted in our recent report with PwC, enabling the widest possible array of issuers will be key to developing a robust, cross border sustainable finance market. Economists call this focusing on the supply side of the equation.  

What we can see is that although there is strong investor demand there is an insufficient supply of sustainable securities to meet this demand. Smaller, newer issuers face barriers to accessing the markets. These include not having access to cross border market infrastructure, shallow local capital markets, unclear issuance processes, and the high costs of meeting and disclosing ESG standards.  

“The paradox is that those issuers who need the money most have the least access. To break the paradox, we are helping to create pathways for inclusion, following the playbook set out by Euroclearability,” said Bernard Ferran, Chief Commercial Officer at Euroclear Group.  

There are many countries that have operated with sub-optimal access to mainstream global financial markets. But by linking their local capital markets and bringing their standards and processes in line with those of Euroclear, these countries have rapidly increased the investibility of their markets. 

“To break the paradox, we are helping to create pathways for inclusion, following the playbook set out by Euroclearability”

Bernard Ferran, Chief Commercial Officer - Euroclear group

This allows governments to lower their cost of capital and reduce their debt service burdens, which frees up budget for spending on social good such as clean energy, hospitals, and schools. We call this Euroclearability. 

The same process can happen with sustainable finance. In our recent report with PwC, we showed that expanding the sustainable market to more asset classes and participants will deliver widespread dividends. But this is not without challenges. We need to better match investor requirements for ticket size and returns, with the mix of issuers and sustainability themes that are available in the market. The issuing process for sustainable securities is also complex and time consuming. Moreover, sustainable finance comes with heavy obligations on due diligence, reporting and verification, all of which are further headwinds and as a result, many issuers are discouraged from raising sustainable finance.  

But these barriers can be overcome through the developing of a central, standardised process that lowers the cost of issuance, allows the efficient sharing of data that the market requires, and broadens the scope of the market both in terms of asset classes and participants.  

A further incentive is that since the end of the global financial crisis we have seen a wider range of issuers becoming excluded from the traditional financial markets. Changes to bank capital regimes, strengthened collateral requirements, and reduced risk appetites have made today’s financial markets more exclusionary, not less. If the sustainable financial markets are to thrive, we need to reverse this trend and increase financial inclusion. As an FMI we are in a unique and precious position to be able to help with that and get the finance to where it is needed the most. 

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ESG and building an ecosystem of sustainability: video

Regulators are expanding their focus on incorporating sustainability into investment decision making, but lack of consistent and robust data remains one of the biggest challenges facing asset managers.

Watch MFEXbyEuroclear addressing this issue