We host quarterly ESG investor meetings with our US capital markets colleagues, and this quarter we spoke with 10 investors, reflecting a microcosm of US buyside views on ESG.
Some of the themes arising from these conversations included:
- While sustainable debt is viewed positively, investors are still considerably concerned about the liquidity of the ESG asset class
- Signing up to the UN Principles for Responsible Investment (PRI), which now has more than 7000 signatories, is increasingly seen as a ‘must’
- The EU Taxonomy is making waves over the Atlantic: Investors welcome the framework and aim to apply it to their investment processes despite the taxonomy not being a legal requirement in the US
- While Green, Social & Sustainability (GSS) Bonds are well understood, the characteristics and benefits of Sustainability-Linked Bonds (SLB) are not yet fully clear; issuers, banks and other market stakeholders must provide more education on this ESG product sub-category
The 6 key takeaways
Looking at US investors’ ESG approaches, we gained some valuable insights from our thematic discussions. We also asked a standard set of multiple-choice survey questions (Figure.1) which garnered some interesting results. The key takeaways are presented below:
- US Investors expect a significant uptick in GSS debt: 83% estimate that more than 10% of the $ market will become sustainability labelled (from 1% currently). At the same time, 92% said they have appetite for subordinated ESG debt. Looking at the growth of their ESG assets, 17% said they expect the share of ESG assets in their portfolio to be over 50% in the next two years.
- When it comes to preferences of sustainable bond structures, use of proceeds bonds enjoy marginally more support (55% of respondents) versus sustainability-linked bonds (45%). The reason for the hesitance in fully embracing sustainability-linked lies in a lack of clarity about the characteristics of this relatively new sub-category in the capital markets, with associated International Capital Market Association (ICMA) Principles only released in June 2020. With a growing number of firms opting for sustainability-linked bonds in order to avoid restrictions around identifying and maintaining a specific green and/or social pool of assets, it is down to those issuers and their partner banks to continue educating investors about the benefits of sustainability-linked bonds.
- There’s a clear interest in the evolution of the regulatory landscape, both in the US and in Europe, with 67% of investors participating in the survey expected to embed the EU Taxonomy within their investment process in the next two years. The fact that the EU Taxonomy, which provides detailed eligibility criteria for economic activities that can be called sustainable in Europe, is making waves across the Atlantic despite not being a legal requirement in the US underlines yet again the desire across investor and business communities for a universal green language.
- Views on the development of the ‘greenium’ are differing: similar numbers of investors expect the price advantage for sustainable debt – green yields are fairly consistently below vanilla ones (although not by much) – to either diminish, stay rangebound or increase.
- Greenwashing is considered the biggest concern for the market (67%) followed by political change in the US (33%). In this context, investors are significantly upping their game to retrieve reliable ESG data from potential investment targets: a mix of in-house analysis using company disclosures and external ESG rating agencies and data providers, as well as direct issuer engagement supports ESG scoring. Furthermore, investors are keen to learn more about applying climate methodologies to their investment process – as such, issuers should expect investors’ scrutiny to further intensify.
- Looking at exclusion strategies as part of a sustainable investing strategy, relatively high proportions of funds expect to exclude tobacco (67%) or oil and gas (42%) by 2025, while no such momentum exists behind defence or chemical sectors.
Figure 1: Investor Questionnaire