Global Trend

Sustainable Finance

Moving into the mainstream

Sustainable finance, albeit at a small scale, has now firmly entered the mainstream.

From environmental, social and governance (ESG) portfolio screening to impact investing to achieve the SDGs, banks and institutional asset managers are seeing the long-term financial dividends of focusing on ESG risks and opportunities.

Global asset managers in the US, Europe, Japan and Australia are paying attention to growing client appetite for investment products that benefit society and the environment. Simultaneously, both banks and institutional investors are facing increasing public criticism for continuing to support carbon intensive fossil fuel companies. Some of the world’s largest financial institutions are beginning to listen. While the growth of ESG products has been impressive over the last two years, and divestment in coal is increasing, both are occurring at a relatively small scale when compared to the total global investment market. If the global community is going to keep global warming to 1.5°C and achieve the SDGs by 2030, global finance will need to shift from incremental changes, to industry transformation.

2020 Forecast

An increase in the issuance of both green and social impact bonds is likely as demand for investments that positively affect society and the environment continues to grow. We may also see increased scrutiny regarding the burgeoning ESG product market, with industry experts more astutely assessing the actual impact of products using improved social and environmental measurement data. Meanwhile investors will become increasingly active in engaging companies on climate change risks and opportunities — both through direct conversations with executive leadership — as well as proxy voting and divestment.

Signals to Watch

  • According to The Global Commission on the Economy and Climate investment of some $90 trillion is needed over the next 15 years to achieve global sustainable development and climate objectives.

  • The sustainable finance market is now estimated to be worth more than $380 billion a year.

  • In 2018, approximately $58.8 billion in social and sustainability bonds were As of October 2019 the green bond market alone surpassed $200 billion in total issuance.

  • The Bank of England has estimated that investments worth more than $20 trillion could be left stranded as governments set more ambitious climate targets.

  • BlackRock and Vanguard control the largest blocks of shares in nearly every publicly-traded firm in the US, and have come under increasing criticism for their failure to vote in favor of key climate proposals where they held majority shares. They will be under increasing pressure to vote in accordance with their stated positions on climate in 2020.

  • BlackRock has announced it will no longer invest in companies that generate more than 25% of revenue from thermal coal. The giant investor is following in the footsteps of BNP Paribas and Norway’s $1 trillion sovereign wealth fund who have previously made similar commitments.

  • The German government will begin issuing more than $10 billion in green bonds to finance green investments from 2020, according to a draft climate plan released by the country’s government.

  • In fall 2019, 130 global banks with more than $47 trillion in collective assets launched the Principles for Responsible Banking. The aim of the framework is to accelerate the banking industry’s contribution to achieving the Sustainable Development Goals and the Paris Climate Agreement.

  • Wall Street’s growing interest in impact investing has drawn scrutiny from the SEC, which is calling for the creation of ESG standards in order to better track effectiveness and impact.

“One of the most promising recent developments has been a growing number of new public and private sector financing instruments available for low carbon and alternative energy projects such as green bonds, blended finance, and others. However, many of these kinds of projects remain unbankable and need further preparation and resources in order to benefit from available financing instruments.”
Juana Hatfield, Consulting Director, South Africa, ERM

Advice for Business

  • As asset managers gain a more mature understanding of ESG risks and opportunities they will expect more and better data and dialogue with companies. Companies will need to demonstrate that sustainability is integrated into the business and investor relation teams are able to communicate industry comparable sustainability performance data to investors.

  • As greater scrutiny is placed on the effectiveness of ESG products, more rigorous, standardized data to assess impacts will be expected from companies.

  • Companies need to ensure their own investments, particularly employee pensions, are aligned with their own sustainability goals. If a business has a commitment to work towards net zero emissions, then its pension investments should be consistent with that goal. Actively supporting pension divestment from carbon-heavy stocks is an ambitious step that companies should take.

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