Deutsche Bank AG has just completed its first green repurchase agreement, marking another foray into a world of increasingly complex ESG instruments.
It’s the latest example of product proliferation in a market that’s moving much faster than regulators. JPMorgan Chase & Co. has already said it plans to attach environmental, social and governance labels to all forms of finance, as ESG derivatives start to become a market fixture. Deutsche says it intends to continue expanding its offering of ESG instruments.
Regulators have yet to decide what a green repo is. The European Repo and Collateral Council has been consulting market participants on how best to define a sustainable repo deal, with a variety of different approaches emerging. In the meantime, the addition of more exotic products to the ESG market means an asset universe that already reached $35 trillion last year is set to grow at an even faster pace.
For its green repo, Deutsche transferred securities to London-based asset manager M&G Investments. In return, the German bank received cash to fund its green asset pool, which includes renewable energy projects such as wind and solar power plants, as well as the improvement of energy efficiency in commercial buildings.
Deutsche says the transaction is the first of its kind in Europe. BNP Paribas SA has completed a similar deal with Agricultural Bank of China Limited.
Claire Coustar, Deutsche Bank’s global head of ESG for fixed-income and currencies, said the hope is that the green repo “will encourage more activity so that a new source of green finance can be developed for the industry, as well as a new asset class for investors.”
The multi-trillion dollar repo market is grappling with how best to adapt to the sustainable finance revolution. There are broadly three different approaches:
Using the proceeds from the cash leg of the transaction on green projectsUsing sustainable collateral, such as green bondsTying the repo rate to the achievement of sustainability goals
The Deutsche-M&G repo uses the first of these. The bank completed a deal with Akbank TAS last month that tied the repo rate to the achievement of goals concerning gender balance, renewable energy use and avoidance of funding to coal power plants.
Chief Executive Officer Christian Sewing has made clear he intends for Deutsche Bank to gain a solid foothold in the rapidly expanding market for ESG, which Bloomberg Intelligence estimates will exceed $50 trillion by 2025. Overall, Deutsche Bank has set itself targets to facilitate 200 billion euros ($260 billion) in sustainable finance and investments by the end of 2023, and has also linked top executives’ pay to those targets.
Meanwhile, Deutsche’s asset management arm, DWS Group, is being investigated for allegedly inflating the value of its ESG holdings. The unit has vehemently rejected the claims, but the industry has taken note of the change in tone as regulators start to crack down on greenwashing.
Deutsche’s plan to introduce more ESG financial products in the coming months rests on its ambition “to be a market leader in ESG fixed income,” said Coustar. Given the bank’s experience “across the product spectrum,” the intention is “to leverage that expertise to help develop the sustainable finance market,” she said.
“Through this transaction, both parties have for the first time actively targeted ESG outcomes,” said Nina Moylett, Managing Director of Cash and Currency at M&G. “This demonstrates how capital can be allocated to drive innovation in markets that will open up new sustainable opportunities for investors over time.”