The famous primatologist and anthropologist, Jane Goodall, famously said: “You cannot get through a single day without having an impact on the world around you. What you do makes a difference, and you have to decide what kind of difference you want to make.”
Investors have certainly begun to heed her words with socially responsible investment gaining a lot of traction over the last few years, as investors increasingly look to not only make a strong return on their investment but do so without harming the environment in the process.
In fact, the level of interest in financial instruments that boast strong environmental credentials has grown significantly, with environmental, social and governance (ESG) integrated into financial analysis and investment decision making by an increasing number of financial institutions.
BNP Paribas Securities Services published a survey of 347 asset owners and managers in April this year, with the report dissecting attitudes towards ESG issues and how the social investment movement is impacting their investment strategies.
Of those surveyed, the report found that ESG plays a major role in shaping investment decisions, with firms and their clients recognising the returns and improved risk management environmentally conscious investing has to offer.
“A majority (78%) of respondents in our 2019 survey state that ESG is either playing a growing role or becoming integral to what they do as an organisation,” BNP Paribas Securities Services General Manager Patrick Colle said.
“The Global Sustainable Investment Alliance’s (GSIA) latest review finds increased demand for sustainable and impact investing – there are now $30.68 trillion of assets being professionally managed under responsible investment strategies, an increase of 34% since 2016,” he added.
The rise of ‘green’ bonds
One of the newest and fastest growing asset classes helping to facilitate the ESG movement are green bonds, a debt instrument used by corporate treasurers to exclusively finance new or existing green projects.
US-based tech company Apple has already jumped on the green bond bandwagon, with the company completing a $1.5 billion issue last year to finance the company’s conversion to renewable energy and increase its use of biodegradable materials. Meanwhile, Japanese carmaker Toyota concluded its own $1.75 billion green bond issuance back in 2014, helping it to fund consumer loans and leases for its line of hybrid vehicles that includes the incredibly popular Toyota Prius.
In 2018, global green bond issuance rose to $168 billion with the market forecast to expand to $250 billion in 2019, according to the Climate Bonds Initiative. However, despite the increasing size of the green bond market since its launch in 2007 the asset class still only accounts for less than 0.2% of the $100 trillion global debt market.
In an interview with Financial Review, Katharine Tapley, the head of sustainable finance at Australian bank ANZ, explained how an increasing number of corporate treasurers are look at green bonds and other environmentally aligned debt instruments to not only diversify their financing but their investor base too, but admitted that the market is still in its infancy.
“We are still in the education process around corporates and issuance is not as voluminous as we would like but awareness is building,” she said. “We are in the very early stages of a market that is beginning and the volume will continue to kick up each year across bonds, loans and other forms of finance.”
Green bond regulation
Despite the green bond market growing year-on-year, corporate treasurers’ slow adoption can be forgiven. After all, the market still is without an official regulatory body with the power to definitively define what constitutes as green, leaving investors worried about the prospect of inadvertently supporting greenwashing or funding unsuitable projects. However, the establishment of the ‘Green Bond Principles’ (GBP) which created a global framework for the issuance of green bonds, along with other new initiatives have helped to improve confidence in the market.
Treasurers tend to worry about putting the reputation of their business at risk when issuing a green bond, with the company likely to face increased scrutiny over how capital is deployed, as well as the environmental merits of the project(s) itself. One way to address this issue is through increased transparency. For example, Apple opted to have EY carry out an annual audit on its $1.5 billion bond issuance to breakdown to stakeholders exactly how the capital was being deployed. Large corporates like Apple help to provide a blueprint for green bond issuance for others to follow, with various methods and metrics for defining environmentally conscious investing being fleshed out on a trial and error basis.
Leading the way in the green bond revolution is China, with the country opting to embrace green finance as part of its 2015 five-year plan. Last year, China’s green bond issuance totalled $34 billion, with Chinese lenders responsible for more than 50% of total green bond issuance by banks, according to data compiled by the ratings agency S&P Global. However, the exact use of the proceeds has at times been unclear and there have been media reports that some of the capital raised was used to finance coal. Overall though, the country is helping increase demand for green bonds with it planning to invest more than $6 trillion into renewable energy and clean tech projects over the next two decades.
The green bond market was given a major boost after the signing of the Paris climate agreement in December 2015, with China, the EU and India all doubling down on their commitment after President Donald Trump withdrew the US from the accord. And as more and more corporate treasurers around the world continue to see the benefits of embracing the green bond, the fledgling financial instrument is well on its way to becoming a mainstream financing tool for treasurers.