The Future of Sustainable Investing: A Decisive Year for ESG
While 2020 was labeled the year of climate action, 2021 may be remembered for being a decisive year for climate finance. With the United Nations Climate Summit COP26 taking place later this year, the spotlight will be on how financial services are contributing to the fight against global warming. How far has the sector come in addressing the transition to net zero and how will it commit to ensuring a lower emissions future?
2021 has also seen continued momentum around sustainable fixed income investing. Regulation in the form of the Sustainable Finance Disclosure Regulation (SFDR) is likely to fuel ESG adoption in fixed income. It may even balance out the historic trend for equity to lead and fixed income to lag in ESG. How will regulation and continued investor interest in ESG drive this growth? And what are the main challenges?
- Cynthia Cummis, Director of Private Sector Climate Mitigation, WRI, andSteering Committee Member, Science Based Targets Initiative
- Matthieu Guignard, Global Head of Product Development and Capital Markets, Amundi ETF, Indexing and Smart Beta
- Dr. Andreas Hoepner, Professor of Operational Risk, Banking & Finance at University College Dublin (UCD); serves on the EU’s Platform for Sustainable Finance
- Stephanie Maier, Global Head of Sustainable and Impact Investment, GAM Investments
- Eric Usher, Head of the UN Environment Programme Finance Initiative (UNEP FI)
- Steve Waygood, Chief Responsible Investment Officer, Aviva Investors
The Bloomberg team included:
- Alastair Marsh, ESG Reporter, Bloomberg
- Shaheen Contractor, Research Analyst, Bloomberg Intelligence
- Sanjay Rao, Head of Fixed Income Index Product EMEA, Bloomberg
Below are some highlights from the event.
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On Taking Action on Climate Finance:
Alastair Marsh, ESG Reporter, Bloomberg, kicked off the first panel by asking whether COP26, scheduled to be held in Glasgow later this year, represents the last opportunity to put markets on a trajectory to deliver on the Paris Agreement? We have limited time, Marsh pointed out, adding that urgency is the order of the day.
Cynthia Cummis, Director of Private Sector Climate Mitigation, WRI, and Steering Committee Member, Science Based Targets Initiative, said COP is a critical moment. “It’s a really important opportunity to get the financial sector to signal their attention to aim for net zero, which is a critical North Star,” Cummins said, adding, “The financial sector is a few decades behind companies in terms of measuring their impact on the climate and taking action to reduce their impact on the climate and setting targets.”
Eric Usher, Head of the UN Environment Programme Finance Initiative (UNEP FI), said we need a really important inflection point at COP in Glasgow. “We have to drop the notion that everybody needs to be doing something to essentially everybody needs to be doing everything,” Usher said. He added, “It’s not about issuing a green bond and writing about it in your CSR report, it’s about your entire business, it’s a strategic implication — what does it mean for how we operate, for how our customers operate?” Usher addedthat coming out of COP, “we need the realization that it is about everything we do, it’s not an add on.”
Steve Waygood, Chief Responsible Investment Officer, Aviva Investors, said loads of financial institutions claim to have ESG in their DNA. However, he pointed out that, in a large number of cases, this is a relatively recent acquisition and it is not necessarily embedded in a company’s governance. “So, can we rely on volunteerism? No, we definitely can’t,” Waygood said, adding, “we need the laggards, we need everybody, and that requires mandating.” The question then becomes, what do you mandate? “You can’t legally require everyone to become net zero. That’s not how markets work. For as long as there’s money to be made by doing the wrong thing, someone somewhere will do the wrong thing,” Waygood said.
On ESG Integration and Trends:
Shaheen Contractor, Research Analyst, Bloomberg Intelligence, highlighted three key trends.
While ESG is growing, the real growth over the last few years has come from climate strategies. “Things like clean energy ETFs or even low-carbon ETFs,” Contractor said. She pointed out that these areas have grown significantly versus the levels they were in 2019 and that these numbers are in “no way small.”
The second trend she expects to see is an increasing scrutiny of ESG funds to make sure they are following their intended strategy. “In the U.S., the SEC recently issued a risk alert for ESG funds, questioning their ability to follow an ESG theme,” Contractor said.
And, finally, she highlighted the growth we are seeing in sustainable debt. “They’ve crossed $500 billion in 2020 and, in fact, if that pace is maintained, we think that could cross a trillion this year.” She also pointed out that social bonds have been taking a larger piece of the ESG pie as a result of the pandemic and issues of racial equity. “It’s really the emergence of the S within ESG,” Contractor said.
On the Evolving World of ESG Within Fixed Income:
In discussing why fixed income has been behind the curve on ESG, Stephanie Maier, Global Head of Sustainable and Impact Investment, GAM Investments, stated, “Listed equity has historically dominated both the products available and our overarching approach to responsible investment. What we’re seeing with fixed income is some real invasion around green, social and sustainability bonds as a new asset class. In terms of how we integrate ESG issues, for fixed income it’s mainly looking at the downside risk and how we identify and manage that, whereas for equities it’s very much an upside and downside balance. And ESG data, the availability of that data, has historically been quite a limitation in enabling us to do that appropriately.”
Matthieu Guignard, Global Head of Product Development and Capital Markets, Amundi ETF, Indexing and Smart Beta, attributed the difference to two historical reasons. “When you look at the ETF market, fixed income is only a limited portion of that market, around 20%. The big chunk of the assets is on the equity part. Historically, also, regarding ESG, the engagement policy was very linked to the voting policy. Therefore, voting is linked to equity rather than bonds. However, we are seeing a catchup in the fixed income assets. Since the beginning of the year, over 150% of the flows are going into ESG fixed income products, showing that not only is there a very strong catchup but also a peer switch from vanilla to ESG products occurring in the fixed income asset class.”
Dr. Andreas Hoepner, Professor of Operational Risk, Banking & Finance at University College Dublin, said, “Fixed income data is much harder to maintain. Fixed income itself doesn’t have data availability for various issuers that are non-standard, it’s a more diverse set of issuers, it’s harder to develop the data. On the other side, equities are both easier to understand and people love the narratives of the upside.” Dr. Hoepner added, “Equity really is about voting engagement and sustainability and responsibility, expressing your views, but, in many cases, except for clear-cut things like coal and tobacco and ammunitions, maybe not directly about divestment. On the fixed income side, it’s predominantly the primary market, so it’s a lot more about the actual impact. Debt denial is a lot more of an attractive option than divestment comparatively.”
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