A record $649bn poured into ESG-focused funds worldwide through November 30 last year, up from the $542bn and $285bn that flowed into these funds in 2020 and 2019, respectively, according to Refinitiv Lipper data.
Global sustainable investments are now estimated to range between $35tn and $40tn, while ESG funds now account for 10% of worldwide fund assets.
Extreme weather becoming more frequent and events highlighting social justice issues contributed to ESG rising to the top of the agenda of investors, companies and policy makers.
But bond issuers now appear to be reviewing the merits of tapping the ESG debt market, based on an assessment that the lower financing costs the label generally brings aren’t worth the risk of being exposed to greenwash accusations.
Amid mounting concern that only a fraction of such assets are bona fide “environmental, social, and governance” (ESG) investing, there are calls for tougher regulations to stamp out the false claims by fund managers.
Matt Patsky, who introduced the world’s first “green-chip” index of socially responsible companies in 1994, estimates that of the $35tn that the Global Sustainable Investment Alliance says is parked in sustainable investments, less than $1tn is in “real” ESG.
Such warnings are becoming more frequent as the mood around ESG shifts.
Goldman Sachs Group’s NN Investment Partners is among asset managers getting pickier and is increasingly rejecting ESG debt pitches, it said last month.
Issuers increasingly have to contend with the reputational risk of sending ESG debt to market that may not yet be fit for purpose.
Last September, Bloomberg News published an analysis of over 70 sustainability-linked revolving credit lines and term loans arranged in the US since 2018, revealing that over a quarter contained no penalty for falling short of stated goals, and only a minuscule discount if targets were met.
In Europe, a case in point is the evolving language that asset managers are using around a product called Article 8.
Defined within EU sustainable finance disclosure regulations as a product that “promotes” sustainability, a number of investment managers are nonetheless choosing not to attach an ESG label.
Some companies have expressed reservations about issuing ultra-long green debt in particular, citing a fast-changing regulatory landscape and reputational risks.
Green bond issuers could opt to reduce tenors to avoid jeopardising their green credentials as market thresholds tighten, according to Maia Godemer, associate at BloombergNEF.
It’s been a bumpy stretch for adherents of investment strategies based on ESG data.
But in a new paper entitled “Does ESG Really Matter — and Why,” consultants from McKinsey & Co run through the many reasons why ESG has attracted such intense criticism of late.
They ultimately conclude that, regardless of the current turbulence surrounding its specific components, ESG’s underpinnings and the “social licence” adherence to them will remain important for companies far into the future.
For the best outcome, companies should focus on ESG improvements that are informed by and support the evolution of their business models, even if the improvements don’t directly lead to higher ratings, the McKinsey authors wrote.
Global ESG assets are on track to exceed $53tn by 2025, or more than a third of the $140.5tn in projected total assets under management, according to Bloomberg Intelligence earlier this year.
Make no mistake, ESG is clearly a money machine for the finance industry. Its impact on the real world, however, isn’t always easy to discern.
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