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G-20 paper promotes development of green CLOs, eyeing climate change

The G-20 Sustainable Finance Study Group, which is co-chaired by the Bank of England and the People's Bank of China, released a white paper that calls for the creation of a sustainable collateralized loan obligation market to help tackle climate change.

The paper was co-authored by S&P Global Ratings, SEB and White & Case with input from Och-Ziff Capital Management, APG and ICMA.

The paper addresses the need to raise $100 trillion in sustainable energy infrastructure funds over the next 15 years to achieve the goals of the Paris Agreement on climate change that aims to limit global warming. Banks alone cannot finance this investment, yet securitized products such as CLOs would help free up bank balance sheets by buying the infrastructure loans that banks originate, the paper said.

"A new sustainable CLO market is the only mechanism to finance sustainable infrastructure projects at the pace and scale required to achieve the goals of the Paris Agreement," said White & Case partner Chris McGarry, who together with professional support counsel Mindy Hauman, worked with the G-20 Sustainable Finance Study Group on the white paper. "There is a clear opportunity for institutional investors, which have access to a deep pool of capital."

The bond market currently provides little of the overall funding for the infrastructure sector, around 15% of the total. The paper argues that the development of a sustainable CLO market is the natural and optimal capital markets solution to redress the balance.

Permira Debt Managers took an initial step this year toward creating a sustainable CLO market by pricing a European CLO compliant with environmental, social, and governance criteria. The policy is becoming increasingly more important for other fund managers active in the leveraged loan and high-yield bond market.

In November, S&P Global Ratings for the first time published research in which it built a hypothetical rating scenario for a green CLO, to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction. The analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality and higher recovery-rate assumptions.