Spots changed
For underwriting more ESG risk and bonds than any other bank, innovating with new product developments and harnessing the power of its global investment bank to play a key role in transitioning high-emitting companies, JP Morgan is IFR’s ESG Financing House of the Year.
Sustainable finance moved into the mainstream and onto a global footing in 2020 as the pandemic heightened awareness of ESG, and the US and Asia followed Europe’s lead as the hard work of transitioning to net-zero emissions got underway.
It was a year of radical change for JP Morgan, which has been named as the biggest lender to fossil fuel companies in each year from 2016 to 2019 by the Rainforest Action Network, largely due to its exposure to US shale. Reversing this perception will require a determined global approach and will be a multi-year project.
But JP Morgan’s strength in fixed income and longstanding client relationships are positioning the bank to be a major player in the energy transition and part of the solution by creating decarbonising pathways for high-emitting companies and sectors that need them most.
“The dimension of ESG in everything we’re doing in banking, and not just from a financing or DCM perspective, has changed tremendously in the last 12 months,” said Marc Baigneres, head of Western Europe investment-grade finance.
JP Morgan underwrote US$34bn of sustainable bonds and completed the most deals (127), narrowly beating the French banks that have helped to create the market – BNP Paribas at US$30.8bn (110 deals) and Credit Agricole CIB at US$30.78bn (104 deals).
The climb from fifth place with US$9.6bn and 70 deals in 2019 was remarkable in a super-competitive and fast-moving market. Success was due to JP Morgan’s global focus on ESG and client servicing, as well as close engagement with DCM partners.
Round the world
While being big in fixed income with strong ties to US funds brought underwriting roles, it was not the whole story. Around 56% of the bank’s 2020 ESG deals were from EMEA with 34.4% from the Americas and 8.8% from Japan and the rest of Asia, with the remainder from Africa, with a strong showing across the range of sustainable finance instruments.
JP Morgan’s key strength was in green bonds, particularly in Germany and the US, and the bank issued its own inaugural US$1bn green bond in September to fund green buildings and renewable energy projects, as well as lending to clients for eligible green projects.
It was also strong in sustainability bonds (a mix of green and social) which were dominated by US issuance, and performed well in social bonds which were led by French issuers, and put its stamp on the rapidly growing sustainability-linked bond market.
Marilyn Ceci, the bank’s global head of ESG DCM and EMEA head of ESG, Paul O’Connor, helped to play a leading role in the sustainable debt markets’ evolution and their experience was in demand.
Ceci, who has almost single-handedly built JP Morgan’s US corporate and global franchise after a long career in ESG, was on ICMA’s working group for the sustainability-linked bond principles, while O’Connor co-chaired its Climate Transition Finance working group.
This thought leadership and innovation was supported by a raft of announcements from the bank that brought JP Morgan in line with ESG leading banks, particularly European lenders that have driven market development to date.
Commitment
In March, JP Morgan announced a US$200bn financing commitment for 2020 to support the UN’s Sustainable Development Goals along with plans to phase out coal exposure by 2024 and a pledge not to finance new oil and gas projects in the Arctic.
In October, JP Morgan went further by announcing a commitment to align the emissions of clients in the oil and gas, electric power and auto manufacturing sectors to the goals of the Paris Agreement to limit global warming, and is currently working on setting intermediate 2030 targets.
“When everyone’s pedalling at the same time in the same direction, it gives you greater capacity,” Ceci said.
JP Morgan also announced a new Centre for Carbon Transition, to support clients’ business strategies and carbon disclosures, which will advocate for a price on carbon and work on commercialising new decarbonising technologies.
“For us to step forward with this commitment is huge, in a way that people don’t recognise given our client base and the history of the bank and where we’ve come from. We’re in a superb position to help a lot of clients with this transition ourselves,” O’Connor said.
Deals, Deals, deals
JP Morgan’s deals map the year in sustainable finance. It was one of the leads on the US$638m-equivalent of senior social bonds for Bank of China, which was the first globally to address the impact of Covid-19 and started the boom in social bonds that defined the year.
The bank was front and centre in the development of the SLB market with a US$750m SLB for Brazilian pulp and paper company Suzano in September, which was the first to follow the publication of ICMA’s principles for the new product.
JP Morgan also led a €1.85bn SLB for Swiss pharmaceutical company Novartis, which was the company’s debut ESG deal. Novartis had never issued a euro deal with a US bank before, but chose JP Morgan (and Ceci) to structure the deal, which included a social KPI.
“Corporates want the ability to structure those more complex transactions that we bring,“ Baigneres said.
JP Morgan also worked on the first ever £500m sterling SLB for Italian utility Enel in October, and also did the first ever bilateral sustainability-linked cross currency swap to convert the proceeds back to euros.
The pioneering deal was the first to require a bank counterparty to match a company’s KPI commitments with similar pledges of its own. Enel pledged to pay a step-up if it missed its renewables target, and JP Morgan committed to a similar step up if it missed its own target to lend at least US$200bn annually in ESG financing.
JP Morgan also rode the wave of rising US activity, with a US$5.75bn transaction for Alphabet standing out due to its use of the sustainability “use of proceeds” label which other US companies followed to address the racial inequality that had been highlighted by the pandemic and Black Lives Matter movement.
Alphabet also addressed a range of themes, including Covid-19 response, the affordability of housing in the San Francisco Bay area, energy demand and efficiency as well as sustainable procurement by including its power purchase agreements as operating expenditure.
The bank’s ESG team proved adept at road-testing innovative products with its institutional client base that were then adopted and replicated – for example, for the retail/apparel and insurance industries with deals that were tailored to the issues facing each sector.
“We’re not creating stuff to put in ESG funds. We are trying to have an impact as a bank and with the products that we’re trying to create for investors,” Baigneres said.
JP Morgan developed a “capex light” model suitable for companies that are not capital intensive but have a big impact on supply chains. It was used in sustainability bonds for German retailer Adidas that focused on circular economy themes, and UK luxury brand Burberry that looked at sustainable cotton supply. *
It also created a green bond model to help insurance companies allocate pools of capital along green lines, as seen with the €200m deal for Austrian insurance company UNIQA, which is expected to be rolled out across the sector in 2021.
The ESG team was also confident enough to tell clients when it was not in their interest to do ESG deals, working in tandem with the bank’s global ESG risk team.
“We find ourselves of course recommending to clients that this is maybe not the time that they should be approaching an ESG-labelled transaction and that maybe they may have a little more wood to chop to do that,” Ceci said.
* This sentence was corrected to describe the two bonds mentioned accurately.
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