Sustainable finance is going mainstream: Here’s how you should prepare for investor-led change

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IIt can sometimes be difficult to keep up with what is going on in the world of ‘green investing’, as the number of announcements and initiatives on the environment, social and governance (ESG) and sustainable finance s ‘is accelerated in the last six months.

One of the last came in June from the G7 summit. The leaders committed not only to “integrate[ding] considerations of climate change and biodiversity loss in economic and financial decision-making ”, but also stressed the need to“ green the global financial system so that financial decisions take into account climate considerations ”.

Rhetoric is also backed by action. In July 2021, the European Commission unveiled an ambitious strategy to help improve the flow of money to finance the transition to a sustainable economy.

Asset managers are pulling out of companies that do not meet their sustainability criteria, while central banks have largely incorporated climate change risks in discussions with central banks.

According to data from BloombergNEF (BNEF), sustainable debt has now exceeded $ 3 trillion borrowed for ESG purposes.

More than 17% of all bonds issued in June were labeled as social, sustainable or green, according to a Bank of America study.

Yet this is not simply being driven top down by policymakers and actors such as financial institutions and corporations – which can lead to being skeptical or thinking that all of this will have an immediate and real impact. The effort is also investor-led – and the impact is turning out to be greater than many initially believed.

According to Bloomberg Green, almost all of the major sustainability activity is breaking last year’s trend lines: Financial markets are issuing more sustainable debt and investors are investing more in ESG-themed exchange-traded funds.

Another outperforming is the sustainable global bond market. After just six months, more ESG-linked bonds were issued than in 2020. And although the sector still represents a fraction of the overall bond market, it is rapidly gaining ground as sovereign investors and others are required to represent a certain percentage. of their funds to green bonds.

How should you start to engage with this? We believe there are three steps organizations should take:

Line up your ESG ducks

If you are going to be in the market receiving dollars from ESG investors, you need to have a documented ESG strategy in place, not developing one at the same time as you are trying to issue debt and write information about your business. ESG strategy and Strategies. For example, companies wishing to issue green bonds must coordinate closely with internal departments on their ESG policy so that they can articulate their positioning to all stakeholders (without greenwashing their strategy). Failure to do so may present reputational risks, as well as application risks in some contexts.

Understand the ESG objectives and sensitivities of your existing and targeted investors

If you want to attract investors who share the long-term view of the business – those whose interests are aligned with those of the issuer, and therefore with your debt issue – it is essential to understand what they will be looking for. For example, if you are looking to attract a particular group of investors and you know that it is important to their fund that they can show carbon emission reductions, it probably makes sense to put your reduction strategy into action. carbon emissions at the forefront of your debt. emission.

Transparency, reporting and verification

Make sure that you have the appropriate internal reporting programs and external audit processes in place if possible, and provide this information to your stakeholders. This helps prepare a business for the greatest investor sensitivity in the region: avoiding greenwashing.

Granted, this is not going to be a simple exercise. On the one hand, the taxonomy of sustainability – the rules of the road – is an alphabet soup of acronyms and developing standards (TCFD, etc.). And part of the reason for the confusion is that investors, asset managers and issuers have yet to adopt common definitions of ESG.

But progress is being made. A year ago, five leading independent standard setters said they would work together on a comprehensive corporate ESG reporting system. Earlier this year, rules came into force in Europe to require financial companies and investors to disclose that they have considered sustainability risks, as well as how they take into account negative effects. Then, in time for the UN COP26 summit in November, the IFRS Foundation is expected to launch a global sustainability standards council.

But it should also be remembered that elsewhere, the absence of common standards has not prevented the functioning of the underlying systems and approaches that they are designed to guide and underpin: we have US GAAP and IFRS accounting standards in the auditing world, after all.

As more and more investors use ESG criteria to determine whether or not to participate in a deal, this will only boost demand. Are you ready?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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