Denise Odaro: ‘reasons to be bullish’ on sustainable finance in 2023

There are few with as varied and as deep experience in the sustainable finance space as Denise Odaro. Now managing director and head of ESG and sustainability at European private equity firm PAI Partners, Odaro previously served as chair of the International Capital Markets Association (ICMA’s) Executive Committee of the Green and Social Bond Principles.

ICMA’s frameworks have served at the core of green bonds since their inception, and Odaro’s tenure saw key developments such as the implementation of a framework of impact reporting for social bonds, and the introduction of the sustainability-linked bond guidelines.

Odaro also acted as global head of sustainable finance coordination at the International Finance Corporation (IFC), responsible for sustainable finance product development and chairing an ESG integration working group.

Sustainable finance in 2023

Last year, geopolitical tensions, energy shortages and inflationary concerns created volatility that depressed the sustainable finance market.

The largest volumes in sustainable finance have typically been seen in the bond market and, in 2022, sustainable bond issuance amounted to $863bn, down 19% from 2021 according to Bloomberg data.

Even with this somewhat gloomy backdrop, Odaro expects the overall market to stabilise, and sustainable finance products to see growth in 2023.

“In spite of the macro issues of 2022, sustainable debt fared better than the overall fixed-income market, gaining a higher share of the overall debt market. We have seen banks set targets to increase their exposure to sustainable loans and there is rising interest in ESG-linked loans in the leveraged finance market.

“Another reason to be bullish on growth is that there has also been much more guidance provided for other growing and emerging areas of sustainable finance.”

Odaro stepped down from her role as chair of the ICMA Executive Committee last year, though one of the last achievements of her tenure was the publication of resources in support of the market’s transparency and development. These included definitions for green securitisation, metrics for impact reporting, updated high-level mapping to the UN’s Sustainable Development Goals (SDGs) and a pre-issuance checklist for green bonds.

However, Odaro acknowledges that “the window of opportunity narrows” to achieve theSDGs by their 2030 target, and has set an objective to escalate PAI’s investment strategy in response to this.

Also in her previous role at the IFC, Odaro was involved in the development of reference guidelines for “blue” and biodiversity-related finance instruments.

According to Odaro, resources such as these will help the market capitalise on the opportunity that developments, such as the EU Taxonomy or the Inflation Reduction Act in the US, provide to boost the growth of sustainable finance.

SFDR threshold

A key development adjacent to the sustainable finance rebound that may be experienced in the bond markets is the development of regulation, such as the increased threshold of the Sustainable Finance Disclosure Regulation (SFDR) introduced across the EU this year.

Odaro says: “The spirit of the regulation increases pressure on investment funds that raise capital from investors in the EU to implement more transparent ESG policies and reporting.

“Fund managers with the goal of ‘sustainable investment’ (Article 9 funds) or those that ‘promote social or environmental characteristics’ (Article 8 funds) will have to evaluate and report their portfolio alignment with the EU Taxonomy.”

Although the regulation is intended to help investors make informed investment decisions through increased transparency and accountability, Odaro suggests that it is being widely used to guide investment selection.

“This was not the EU Commission’s objective, but it does create opportunities for those that demonstrate a commitment to sustainability.”

In the UK, it appears that the Financial Conduct Authority (FCA) has learned from the investor approach towards the SFDR. Its own equivalent, the Sustainability Disclosure Requirements, is a dedicated labelling scheme, though some have expressed concerns over its approach currently being too simplistic.

Appeals of private equity

After so much experience in the fixed-income space, Odaro is now firmly focused on what can be achieved specifically within private equity.

Of her decision to join PAI, Odaro says: “Put simply, there is an enormous opportunity to create real impact in private equity. The scope for sustainability to increase the value of a business is a fundamental expansion of the traditional risk assessment approach.

“Combining public markets experience with a sizeable private markets platform to effect change is powerful. You could liken it to lighting more candles from one flame.”

PAI committed to responsible investing in 2010, and, according to Odaro, has continued to develop this approach with an eye on bringing about a real economy with reduced carbon emissions.

Wider push for ESG

While institutional investors still gain the majority of attention when it comes to conversations on the decarbonisation of portfolios, private equity firms are clearly active in the space, though they may suffer from a comparative lack of data.

Odaro is keen for all sectors to be pushing for Paris Alignment, and feels that private equity should not be overlooked: “With the ability to influence the operations and strategies of portfolio companies, private equity firms can play a key role in promoting environmentally and socially responsible practices in the real economy.

“As more investors seek out ESG investments, private equity firms with a strong ESG track record will likely be better positioned to attract capital, as they can demonstrate their ability to deliver both financial returns and positive environmental and social impact.”