Legal eye for detail will help battle sustainable finance ‘greenwash’
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Rising demand for sustainable finance means the work of lawyers now ranges from structuring green bonds to helping to draft environmental legislation.
But, as billions of dollars pour into environmental, social and governance (ESG) investments, the legal sector has another role: to tackle so-called “greenwashing”.
The absence of standard measurement and reporting metrics for ESG investments means that companies and funds can make claims about their social or environmental impact that are exaggerated, or greenwashed. Fortunately for lawyers, bringing clarity to ambiguity is a fundamental skill.
“There is a massive amount of capital being put into sustainable finance, which clearly poses the risk that people will claim to be investing on a green basis when they are not,” says Ian Warner, an investment funds partner at Datalis, an investment platform created by law firm Pinsent Masons.
“Lawyers are in a good place to use the tools available to make sure things don’t go wrong,” he adds.
Initially, rapid growth in the sustainable finance market called for legal expertise on the structuring of financial products. It gave Cadwalader, Wickersham & Taft, for instance, the opportunity to work on a pioneering ESG collateralised loan obligation (CLO) on behalf of its client, MUFG Securities Emea, part of Mitsubishi UFJ Financial Group, the Japanese lender.
While ESG language is already included in the eligibility criteria of some CLOs, this one was structured so that the status of each asset in the CLO was assessed before it was acquired and will be subject to due diligence throughout the life of the deal.
“[The CLO] actually looked into the underlying borrowers, the companies and their loans, to find out what they’re all about,” says Claire Puddicombe, a partner at the US firm’s London office.
As well as preventing greenwashing through financial innovation, another priority for proponents of sustainable finance is to make ESG products available to a broader set of investors, including impact-driven retail investors.
Such broader access has so far been curbed by the cost of the complex due diligence demanded by ESG products and funds, and the high amounts required as a minimum to invest.
To break down these barriers, lawyers at Herbert Smith Freehills worked with The Big Issue — the campaigning organisation behind the street magazine sold by homeless people — on its 2018 launch of the Big Exchange, a blockchain-based ESG investment platform.
The platform gives investors access to ESG funds rated for their type and impact and provides an app to enable them to track their effect via live updates, stories, videos and images.
From implementing data protection to drawing up agreements for partner relationships, the HSF team ensured the platform could operate smoothly.
“We were advising on governance and set-up structures, on key foundational and constitutional documents,” says Lucy Curran, a London associate at the firm. “And we did a lot of work around financial services regulation.”
Another way to expand the market and make sure ESG funds are effective is to empower fund managers. This drove Pinsent Masons to create Datalis, an investment fund platform that provides data and automated reporting on sustainable investment opportunities.
“Datalis is helping to educate those fund managers around what their funds should look like, in order to attract as much capital as possible from those interested in sustainable finance and impact,” says Warner.
Whether developing investment platforms or sustainable investment products, the complexity of financial markets demands broad legal skills, says Anna-Marie Slot, global ESG and sustainability partner at Ashurst.
“It’s one thing to have a green bond — but then you need derivatives that follow on from that, investor interest, liquidity in the after-market, and the whole system needs to be transparent,” she says. “Lawyers can bring to the table different approaches learnt from different businesses at different times.”
As fears over greenwashing increase, however, so does the demand for sustainable finance to be better defined and subject to robust measurement and reporting. The legal sector is moving swiftly into this new area.
One example is voluntary carbon markets. As more companies offset their emissions with the use of carbon credits — generated by activities such as tree planting — critics have highlighted the lack of standards and verification.
Lawyers can help to provide an assurance that such offset projects do contribute to emissions reduction. Part of this will mean the creation of a clear definition of an offset from a legal perspective, says Ingrid York, a partner with White & Case in London.
“How do we treat it? Is it a set of contractual rights, a physical asset, or something else, and how do we transfer it? Those kinds of things excite us as lawyers and get us out of bed,” says York, who is part of the Taskforce on Scaling Voluntary Carbon Markets, a private sector-led initiative that is developing recommendations for better transparency and verification.
Regulation will also be essential in combating greenwashing. Lawyers can provide input to policymakers during consultation periods and explain what the new rules mean for clients. With their eye for detail, they will be able to see potential problems during the drafting process.
“One extra word can change the meaning of an entire clause,” says Puddicombe. “It is important when we’re reviewing legislation to make sure that it reflects regulators’ intention but also can be implemented by the market.”
Five trailblazing sustainability leaders
Ingrid Gubbay, of counsel, Hausfeld
Before moving to the UK, Ingrid Gubbay worked as a senior lawyer for Legal Aid NSW, Australia, where she brought group action cases against companies and the government. In the UK, she became principal legal adviser for Which?, the non-profit consumer rights organisation. In 2007, she joined Hausfeld, which specialises in litigation, and now heads its human rights and environmental teams. Two years ago, she represented a group of 15 young people, including Swedish activist Greta Thunberg, which brought a petition to the UN Committee on the Rights of the Child to demand action on climate change. Gubbay champions the role of lawyers in tackling global warming. She chaired the London Climate Change Litigation forums, which were held to coincide with the negotiation of the Paris Climate Agreement in 2015.
Nicolas Jean, partner, Gide Loyrette Nouel
French lawyer Nicolas Jean is an adviser in financial markets in countries including Ivory Coast, Benin and Senegal. Inspired by French President Emmanuel Macron’s call in 2020 for debt relief in Africa, Jean called on his contacts in institutions and governments across the continent. This resulted in a think-tank, sponsored by Gide Loyrette Nouel, which advises on strategies for financing African development without creating unsustainable public debt. As a practitioner, Jean has advised on many creative financing structures, including the first corporate green bond in francophone west and central Africa.
Anna-Marie Slot, partner, Ashurst
In 2019, Anna-Marie Slot moved from Hong Kong to London and was appointed Ashurst’s first global partner for environmental, social and governance (ESG) and sustainability. As a practitioner, she was involved in many of the early green bonds issued in Asia-Pacific. In her new role, she helps to develop industry standards for sustainability-linked finance. She supports the non-profit Climate Bonds Initiative in advising capital markets clients and creating the first ESG guidelines for the high-yield markets in Europe with the Association for Financial Markets in Europe, the London-based banking trade body. Slot has also helped develop products to educate Ashurst’s clients, including ESG Ready, a digital resource on European regulation of sustainability in financial disclosure. In addition, she played a role in setting out Ashurst’s 2023 sustainability goals, which include a 20 per cent reduction in carbon emissions from travel (the firm declared it was carbon-neutral in January 2020).
Adrian Walker, partner, Hogan Lovells
In 2008, Adrian Walker anticipated the trend for law firms to have purpose statements when he helped to launch Hogan Lovells’s projects practice with the slogan “improving equality of access to sustainable infrastructure and energy”. He also took part in the launch of an MBA-style business skills course for social enterprises run by HL BaSE, the business enterprise practice at the firm. In 2021, Walker was made head of ESG and in that role he advises governments and financial institutions on projects connected with sustainability, which have included the Met Office’s acquisition of a supercomputer powered by renewable energy. He is on the World Economic Forum’s social impact council and is a member of the sustainable finance group of the financial services body TheCityUK, looking at the future role of offices in cities.
Ingrid York, partner, White & Case
In her position in the firm’s capital markets practice, York has been involved in several firsts in sustainable finance. In 2017, she was an adviser to Crédit Agricole’s corporate and investment banking arm on its $3bn green capital note, which combines synthetic securitisation with investment goals aligned to the UN’s sustainable development goals. Two years later, she helped to put in place creative legal solutions that enabled a notes issuance by Société Générale, the French bank, for a risk transfer worth $3.4bn allocated for impact investment.
Last year, York was appointed to a task force founded by Mark Carney, former governor of the Bank of England, which promotes voluntary carbon markets.
Case studies in best practice
Researched, compiled and ranked by RSGi. ‘Winner’ indicates the organisation won an FT Innovative Lawyers 2021 award
Lawyers helped clients navigate increasingly sophisticated offerings
WINNER: Cadwalader, Wickersham & Taft
The lawyers assisted the Europe, Middle East and Africa arm of Mitsubishi UFJ Financial Group in developing the first European collateralised loan obligation (CLO) that will consider environmental, social and governance (ESG) factors across all its investments. Some CLOs include language in their eligibility criteria to restrict the types of loans that can be included to those with certain ESG scores. For this CLO, however, the lawyers created a framework to test the ESG compliance of the assets regularly throughout the deal lifetime. The firm also worked closely with collateral manager NIBC Bank in helping asset owners improve their ESG score and reporting regularly to investors on ESG performance.
Gide Loyrette Nouel
Partner Nicolas Jean led the creation of a think-tank to discuss sustainable approaches to financing and debt in African countries. The group — which includes ministers from Ivory Coast, Benin, Republic of Togo and Senegal, along with economists, leaders of financial institutions and lawyers — has provided pro bono advice to African states negotiating with creditors. It will also publish a white paper offering recommendations to governments and financial institutions on where investment can have a genuine impact.
Herbert Smith Freehills
The firm helped The Big Issue — the organisation behind the street magazine sold by homeless people — to launch an investment platform, The Big Exchange, which enables people to invest in ESG and social impact funds starting with a minimum of £25. The lawyers constructed the legal framework, including designing a system for vetting funds to measure their impact and avoid any ‘greenwashed’ products. They also protected the mission of the platform with “golden shares” — giving The Big Issue special rights compared with other shareholders. Impact from the investment funds is recorded on a blockchain platform.
Linklaters and Walkers Ireland
Walkers acted as Irish counsel and Linklaters as English in helping London-based Tramontana asset managers to create a programme in which investors can buy EU-issued carbon certificates, which are required to secure carbon credits. Companies need these certificates that permit carbon emissions and must purchase more if they exceed their yearly limits. By using a special purpose vehicle, Tramontana has enabled these certificates to be traded as assets by retail investors. In the long term, it may increase the value of the certificates until it is cheaper for companies to invest in reducing their carbon emissions.
The impact investment team works with clients that are designing social and environmental impact funds, such as the government and private sector-backed Clean Growth Fund. This invests in clean tech brands, including Piclo, a smart energy company, and Everyone In, a fund to tackle homelessness. The lawyers developed Datalis, a platform that gathers historic data on investment to help inexperienced fund managers with fundraising trends and best practice. In the past year, the firm estimates its work has generated $2bn for impact investment funds.
Lawyers helped Pay. UK, which operates the UK’s retail payment operations, to draft a legal framework for Request-to-Pay. This is an alternative payment mechanism to direct debits, as consumers are sent requests for a payment by a biller rather than payments going out directly from their accounts. Mastercard has used this framework to launch a request-to-pay app for its customers and a number of financial institutions in the UK and Europe are also using the framework. Benefits include greater flexibility and control for consumers, and a reduction in failed direct debit payments.
Working with the bank ABN Amro in the Netherlands, the firm created a contract template for financing product-as-a-service suppliers, whereby customers purchase access but the supplier remains the owner of the goods and is responsible for maintenance and recycling. This presents more complex risks than other investments. The lawyers also created a help desk to support the bank’s lawyers in reviewing product-as-a-service contracts. The long-term goal is to promote a circular economy.
The firm’s sustainable finance and investing group developed a toolkit to support clients in lending and borrowing, with a focus on sustainability. This includes an initial review of the client’s sustainability policies, training on various risks and benefits of sustainable finance, and guiding clients through the process of introducing sustainability-linked loans that incentivise borrowers to achieve ESG targets.
Researched, compiled and ranked by RSGi. ‘Winner’ indicates the organisation won an FT Innovative Lawyers 2021 award