ESG market dynamics – the green bond wave
October has seen a wave of green bonds, lifting the volume of green issuances in the third quarter of 2018 to USD 29.7 billion. The very busy month has helped to boost the total of green bonds issued this year to USD 108.3 billion, less than 1% behind the 2017 figures for the same period.
Placing five green transactions with an issuance volume of EUR 1.8 billion for our customers – Schiphol, Prolongis and European Logistics Fund (EUR), TenneT (USD), IFC and Anglian Water (GDP) - we have noticed the following key developments in the ESG market.
Diversification – new issuers are testing the waters
The Green Bonds market is further diversifying: The third quarter saw 46 market entrants from 18 countries increasing the total number of green bond issuers to 553.
Schiphol’s very well-received inaugural green transaction as well as other high profile green issuances from non-energy sectors – mainly the transport and buildings sector - have encouraged other non-utility issuers to test the waters and consider green bonds as the financial vehicle to boost their own sustainability performance: “If an airport can do it, why can’t we?”
The launch of green bonds from a wider range of sectors will help investors traditionally aiming for a well-diversified portfolio and seeking to apply the same principle to their green bond portfolio. Equally, ESG conscious stakeholders who are looking for green bonds to have a true impact on climate change mitigation will welcome companies from “new” sectors showing commitment to undergo an environmental transition.
Climate Change Regulations – Green is becoming a prudential theme
Our roadshows in the past months have confirmed the continuing trend that Green has become a prudential theme. Climate Change and its risks are universally acknowledged across the globe.
While Europe has continually been considered as “green aware”, the 212 green bond issues from the USA in this quarter deliver yet again proof that Trump’s different stance on Climate Change can’t stop the green wave, but actually continues to help increase its popularity in the US and elsewhere.
Furthermore, the UK Prudential Regulation Authority (PRA) recently published a draft supervisory statement for consultation that outlines its proposals for addressing the financial risks arising from climate change. To read our commentary about this consultation, please click here: NWM experts analyse the key topics that have been put up for discussion
Investors zoom in on social element of the ESG triangle
While environmental and corporate governance criteria have been the focus of ESG investors so far, these increasingly query the social performance of companies they are looking to invest in. During our presentations to potential investors we helped issuers engage on questions such as the company’s relationship with its employees (training/support/incentives offered), its suppliers and the communities it operates in as well as what impact corporate activities have on the surrounding communities and other stakeholders.
Investors and issuers acknowledge the power of ESG
ESG investments now stand at over $20 trillion in AUM, a quarter of all professionally managed assets worldwide. With many studies having shown over the past years that good corporate sustainability performance correlates with good financial results, ESG investors are continuing to review and revise the ESG critieria applied during their investment due diligence.
We have seen the following strategies gaining in popularity:
1) Momentum-based strategies, whereby investors focus on the issuers’ ESG profile trajectory: Does it signal an upward trend and hence should a specific investment considered to be a longer term buy and hold?
2) Positive exposure strategies, whereby investors scrutinise the contribution of potential investments towards specific UN Sustainable Development goals.
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1st November 2018
Dr Arthur Krebbers