UBS Bankers Under Pressure From Lawyers to Rethink ESG Labels

(Bloomberg) — UBS Group AG is asking its bankers to rethink the way they discuss some sustainable products in public following advice from its lawyers, according to people familiar with the matter.

The development affects the kind of language bankers are free to use when presenting a whole array of topics spanning net-zero goals to individual transactions for clients, the people said asking not to be identified revealing internal deliberations. Specific products such as debt-for-nature swaps are among those affected by the heightened level of legal anxiety, one of the people said.

A spokesperson for UBS declined to comment.

The decision to rein in the use of certain ESG (environmental, social, governance) product labels and claims at UBS coincides with a wider shift inside the finance industry, as regulators in Europe churn out stricter rules and the number of activist lawsuits increases. In the US, meanwhile, ESG labels risk triggering the ire of Republican lawmakers intent on banning the financial strategy outright.

The guidance at UBS is designed to ensure the bank isn’t accused of greenwashing or seen to be non-compliant with emerging regulations, one of the people familiar with the matter said. 

The alternative language that lawyers are coming up with is replacing shorthand descriptions that have become the norm in the market. For example, in the case of debt-for-nature swaps — which are intended to help governments refinance debt and then put savings toward conservation — lawyers at UBS are asking bankers to instead refer to the products as Country Debt Conversion With Associated Sustainable Development Goal Funding, according to one of the people familiar with the matter.

“You have to speak in longer sentences if you want to fully convey what you’re talking about,” said Anna-Marie Slot, co-founder of advisory firm Transition Value Partners and a former partner for global sustainability at law firm Ashurst. “It doesn’t look as nice in your marketing brochure, but it’s the reality of regulated financial firms that they need to be able to explain and defend what they’re doing.”

The market for debt-for-nature swaps was dominated by Credit Suisse before the bank’s takeover by UBS last year. The change in guidance around nomenclature hasn’t affected UBS’s plans to pursue such deals, one of the people familiar with the matter said. 

Though accepted in general market parlance, lawyers advising UBS expressed concern that the debt-for-nature-swap label is imprecise and could expose the bank to legal risk, the person said. The sustainability impact of the instruments can be difficult to document, the person said. Also, the label implies that such products function like derivatives such as interest-rate swaps, the person said. 

Typically, banks in the nascent market for such deals have tended to refer to them as debt conversions in client-facing documents. Before its takeover by UBS, Credit Suisse referred to a 2022 deal with Barbados as a debt-conversion-for-marine-conservation, a label it used again for a subsequent 2023 deal for Ecuador.

Credit Suisse also adapted to guidance to stop referring to the bonds used in transactions targeting marine conservation as “blue,” to make clear that the instruments don’t follow the same use-of-proceeds structure as green bonds. 

On the separate matter of “net zero,” UBS is reviewing the bank’s use of the term, in large part due to the passage of the European Union’s Corporate Sustainability Due Diligence Directive, one of the people said. A key plank of CSDDD requires large firms to introduce transition plans that are aligned with limiting global warming to 1.5C from pre-industrial levels, a goal that many in the finance industry now fear is unrealistic.

UBS Chairman Colm Kelleher said in April that the bank prioritizes its own sustainability framework over Credit Suisse’s, given what he referred to as its “broader application across sectors and generally stronger risk mitigants.” In connection with its takeover of Credit Suisse, UBS appointed Beatriz Martin to oversee sustainability, which she’ll combine with her existing role as head of non-core and legacy operations. 

The way in which financial firms talk about sustainability is “going from a phrase that pops up nicely on social media to a sentence on what it is you intend to do, and what dependencies you have in delivering on it,” Slot said.

–With assistance from Natasha White and Jeff Black.

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