Loredana Chitu, Dentons: The focus on sustainability is clearly on the rise, influencing not just equity but also bonds

On the second day of Foreign Investors Summit 2023, Loredana Chitu, Partner and Head of the Capital Markets at Dentons offered a keen insight into the evolving dynamics of the investment world, particularly the rising significance of sustainability in capital markets.

“The sustainable component of investments has become pivotal in capital markets, not only in recent years, with the discussion of official regulations at European and Romanian levels, but even earlier. Investors have consistently inquired about the green aspect of a business, particularly from the perspective of corporate governance. They question the issuer’s objectives, their compliance, and their future plans. This interest has evolved over time, transitioning from a ‘nice-to-have’ to a crucial requirement. Now, investors not only prefer to see such elements in a business plan but certain investor categories outright reject investments lacking a green aspect or other sustainability components.

In this context, it’s unsurprising that the largest initial public offering (IPO) in Europe this year, which raised 1.9 billion euros, was by Hidroelectrica, a green enterprise. Amid a slightly declining capital market this year, Hidroelectrica’s 100% green business operation was undoubtedly a significant factor in the success of these offers. Thus, the importance of sustainability in business is increasingly evident.

Now, as I mentioned, investors scrutinize each element of ESG (Environmental, Social, and Governance) criteria. They assess the environmental impact of a business and examine the corporate governance rules implemented by the issuer. As lawyers preparing companies for listing, we engage in discussions about management components, focusing on the independence of administrators and ensuring a gender balance. We also discuss compliance with environmental protection regulations. At the European level, the regulation concerning the prospectus we adhere to in preparing a listing issue mandates full disclosure of a company’s environmental friendliness.

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This focus on sustainability is clearly on the rise, influencing not just equity but also bonds. Investors are increasingly purchasing financial instruments dedicated to sustainability, such as green bonds, social bonds, or sustainability-linked bonds.

For a Romanian issuer, for instance, issuing green bonds is challenging, as they must ensure the invested funds are genuinely directed towards green initiatives. However, we have had considerable success in this area. Additionally, in Europe, the market for sustainable bonds, or so-called transition bonds, is growing. These bonds don’t necessarily require the proceeds to be used for specific purposes. Instead, they are linked to Key Performance Indicators (KPIs) related to sustainability, which issuers commit to achieving.

As a lawyer, I’ve observed an increasing interest among businesses developing AI solutions for sales in seeking financing through M&A transactions. Currently, we’re handling a particularly intriguing case that I believe will make headlines by the end of the year.

From my specific vantage point as a capital markets lawyer, it’s apparent that no operation can be efficiently executed without software and artificial intelligence. However, there is a growing concern regarding the regulation of AI solutions, which, despite their potential benefits, can also pose risks. This is evident in the use of trading robots, for example. While I’m not an expert in these technologies, I am aware that their usage is prevalent and subject to regulation, a trend I anticipate will intensify.

When sustainable investments first emerged, there was virtually no regulation; they were primarily market standards anticipated by investors in terms of reporting and disclosure. Now, particularly in the realm of green bonds, we are moving towards an increasingly regulated environment. Just last month, the Commission finalized the much-anticipated ESG regulation. While it won’t be mandatory initially, it will certainly set a benchmark in the market. Thus, we are observing a trend towards more detailed and comprehensive regulation, both at the European and Romanian levels, in this domain.”