Environmental, social and governance (ESG) expert My-Linh Ngo, Head of ESG Investment, BlueBay Portfolio Manager, RBC BlueBay Asset Management discusses, the value of engaging with stakeholders to encourage industry best practise.
Unique to the fixed income asset class, and a relatively new development over the past few years, is the emergence of the ESG-labelled issuance market. This enables investors to explicitly direct where they provide funding to issuers, for funds or strategies that are seeking to achieve specific ESG and/or responsible investment objectives helping them to signal their support for specific ESG/responsible investment (RI) sustainability priorities.
The development of sustainability-linked bonds
The use-of-proceeds market was the first to develop, whereby funding is earmarked for spending on eligible products. These can range from green-focused (e.g., clean energy or energy efficiency, to water or waste management), to social (such as education or health projects), or a combination of products based on the United Nation’s sustainable development goals (SDGs). A more recent development is the sustainability-linked issuance market, where instead of funding being associated with projects, the focus is on specific ESG targets with payment of coupons typically linked to the achievement of these. Such developments are very much welcomed and can play a critical role in linking investors interested in investing with a purpose to issuers that align to that purpose, helping to channel much-needed private capital.
Early engagement matters
However, the growth of the market could be damaged if the integrity of the market is undermined by poor industry standards. Given the potential opportunity and risks, we have been engaging with a range of stakeholders at different levels to encourage industry best practice and foster trust and confidence in the market. Such efforts also help to ensure we have access to information from issuers to better evaluate the quality of such issuances.
We recognise the acute needs from both sovereigns and companies to access investor capital to fund their sustainability transition. In our interactions with individual sovereign and corporate issuers, we discuss whether developing a sustainable finance strategy is appropriate, and also what is relevant and appropriate in terms of the design and structure of these. Examples of recent early engagement include involvement into the Emerging Markets Investors Alliance (EMIA) development of Principles of ESG-labelled issuances and inputting the investor perspective into the Inter-American Development Bank’s Green Bond Transparency Platform to ensure it serves as a useful resource for investors.
ESG regulation is getting even more technical, detailed and complex
While European ESG regulatory developments continue to dominate much of the headlines, this year we expect a further broadening of geographical focus. The US and UK, among others, are expected to define their ESG regulatory framework when it comes to the ‘what’ and ‘how’ of ESG/RI investments. The hope from companies and financial institutions is that there will be a harmonisation and standardisation of ESG regulatory approaches across the different jurisdictions. But while we may see some of this happen, the reality is that the regulatory landscape will likely continue to be fragmented, introducing challenges for global firms.
Principles based or prescriptive?
Getting the balance right in terms of being principles-based or prescriptive is proving difficult, and risks being divisive at a time when the industry should be coming together. The compliance and regulatory burden may create challenges for those smaller players who can often be the source of innovative investment solutions in the sector. But it is clear, there is a need for more quality data and analytics to help companies and investors to assess the quality of ESG practices. Despite some scepticism over ratings services and scores, issuer ESG scores and ratings are gaining greater popularity as the basis to determine the investable universe for financial products, the market will continue to shake up the ESG vendor landscape. This, in turn, should bring greater clarity to the ESG-labelled issuance market Green, social, sustainability and sustainability-linked issuance, which is expected to return to growth in 2023, potentially reaching $1 trillion in total.
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