The Boom in ESG Shows No Signs of Slowing
The numbers are simply astounding.
Governments, corporations and other groups raised a record $490 billion last year selling green, social and sustainability bonds. A further $347 billion poured into ESG-focused investment funds—an all-time high—and more than 700 new funds were launched globally to capture the deluge of inflows.
And 2021 is shaping up to be just as frothy. Moody’s Investors Service expects sustainable-debt issuance to reach $650 billion while money flows to ESG funds show no signs of slowing. This will be the year of “green stimulus as major economies attempt to integrate their economic recovery and job creation initiatives with their longer-term efforts to reduce carbon emissions,” Moody’s wrote in a recent report.
Between the election of U.S. President Joe Biden, the rollout of environmental initiatives from the European Union and the proliferation of net-zero emissions goals announced by governments and companies around the world, sustainable bond sales are poised to only go up. Germany, the U.K., Spain and Italy are among the countries that have indicated they plan to issue green bonds.
“We expect green bond issuance to jump by 39% this year as the economy continues to rebound and issuers increasingly pursue debt financing for environmentally-friendly projects,” said Matthew Kuchtyak, a Moody’s analyst.
Investor demand for environmental, social and governance products is surging too, said Peter Krull, founder of Earth Equity Advisors, which oversees about $150 million, almost all of which he said is devoted to sustainable investing. He pointed to a Morgan Stanley report that said 95% of millennials (those born between 1981 and 1996, approximately) were interested in sustainable investing as recently as 2019, up 9 percentage points from 2017.
That’s a lot of buying power, and it helps explain why the biggest fund-management firms in the world, including BlackRock Inc., Vanguard Group and State Street Global Advisors, are flooding the market with ESG-focused funds, Krull said. “It’s opportunistic for them,” he said.
Sustainable funds in the U.S. attracted $51.2 billion in 2020, more than double the previous calendar-year record of $21.4 billion set in 2019, according to researchers at Morningstar Inc. Still, the American market remains a fraction of the size of Europe’s, which accounts for about 81% of the $1.65 trillion of global assets in sustainable funds, Morningstar reported.
“It’s still the wild west,” Krull said.
However, Krull said, too many of the so-called ESG funds are investing in industries and companies that have done little to lessen their carbon footprint. He pointed to McDonald’s Corp., Exxon Mobil Corp., Raytheon Technologies Corp., DuPont de Nemours Inc., Martin Marietta Materials Inc. and Kimberly-Clark Corp. as examples.
“And then, there is the social aspect,” he said. “We don’t want to see defense contractors in there, much less fossil-fuel companies.”
There is always the issue of greenwashing. In the fixed-income market, some investors have raised questions about whether proceeds from labeled sustainable bonds are actually being used to fund projects that are environmentally friendly and socially responsible, Kuchtyak said.
“We anticipate there will be an increasing focus on refining standards around sustainable bonds, in part as a way to address these investor concerns, but also to protect consumers and ensure alignment with energy and climate policy,” he said. In Europe, the sustainable finance taxonomy and the EU’s green bond standard are being developed, he said.
Sustainable finance in brief
Environmentalists are targeting banks in their efforts to slow global warming, Bloomberg Businessweek reports.
Wells Fargo said it will invest in six Black-owned banks as part of a broader $50 million pledge to support minority-focused lenders.
Debt that rewards borrowers for hitting ESG targets is the next frontier for sustainable finance, according to JPMorgan.
Japanese public pension fund boosted investments in ESG-related stocks by more than sixfold in its $62 billion domestic equity portfolio.
Bank of America says that the next race for global political and economic supremacy will focus on climate.
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