ESG-based investing is here to stay, say executives
The rise of environmental, social, and governance (ESG)-based investing will likely accelerate as a younger, more values-oriented crop of investors enter the global markets, company executives and asset managers told attendees at S&P Global Ratings' ESG Evaluation launch ceremony in New York.
"All of the factors that go into E, S, and G are of growing interest for issuers and investors," S&P Global President and CEO Doug Peterson told attendees at the launch ceremony. "Now more than ever, companies understand and have a much better appreciation of their responsibilities as corporate citizens. We see ESG matters as an essential component of sustainable company performance."
Steven Bocamazo, vice president and associate director of credit research at Boston-based Loomis Sayles, said he "used to get blank stares from CFOs" when he asked about a company's approach to ESG issues and how ESG factored into its long-term strategy. That has changed, he said--though there's still much to be done.
Until recently, much of the ESG focus involved equity investing, and it has "taken a while for the fixed-income side to get up to speed," Bocamazo said. "What analysts are looking for is somebody that's going to provide information and the vetting of the information."
"The range of information we get from these companies varies dramatically," he continued. "Some of them just don't have the infrastructure to do it--or that's what they tell us--and that poses a problem."
S&P Global Ratings' launch of its ESG Evaluation, which provides a cross-sector, comparative analysis of an entity's ability to continue to operate successfully based on how ESG factors could affect the its stakeholders and lead to a material financial impact, may help address this. These evaluations are separate from credit ratings and are forward-looking, qualitative, and data-driven assessments of ESG performance and preparedness.
Paul Cutler, treasurer of NextEra Energy, whose subsidiaries include Florida Power & Light, agreed, adding that "forward-looking" is the key to any assessment. He also warned of "greenwashing," or when companies spin information to make it appear as if their products or policies are more environmentally friendly than they really are.
"A lot of companies say all the right things, but when you really break it down, are they doing the right things?" Mr. Cutler asked. He also highlighted a nascent trend--particularly in Europe--in which banks have curbed lending to the worst ESG offenders or have changed loan pricing to reward, for example, borrowers with small carbon footprints.
"It's going to become a more and more important part to raising capital," he said. "Companies were slow to come around to this, but they're getting there."
As it stands, assets invested in line with ESG-related strategies reached USD30 trillion last year, according to estimates by the Global Sustainable Investment Alliance, building on a 25 per cent increase from 2014-2016. And this total looks set to surge as millennial investors – who, according to a Morgan Stanley study, are nearly twice as likely to invest in companies and funds that meet their environmental and social values--are reportedly set to inherit an estimated USD30 trillion in wealth in the coming years.
Susan Story, president and CEO of Camden, N.J.-based American Water, told attendees she's seen firsthand the growing interest in ESG among fixed-income investors.
"The amount of discussion about ESG in fixed-income is amazing," Story said. However, she pointed to a "significant lack of standardisation" in ESG analysis. "We've got to have some kind of standardisation that cuts across this."
As part of the same panel, Peter Gleason, president and CEO of the National Assn. of Corporate Directors, said a lack of consistency could turn companies' caring about ESG into merely a compliance exercise.
"There's no harmonization in the field right now," says Gleason. "In order to do it right, we can't have hundreds and hundreds of people asking companies for different information."
S&P Global Ratings' ESG Evaluation draws on insights from our network of credit analysts, information provided by an entity's senior management, and data and information from Trucost and S&P Global Market Intelligence. It also incorporates data and information from public bodies and nongovernmental organisations, like the UN Principles for Responsible Investment and the Carbon Disclosure Project.
"When we designed the ESG Evaluation, we wanted to make sure that we take advantage of all the great work that's been done in sustainable finance, so we've aligned our diagnostic with a number of pre-existing frameworks, including those of the Sustainability Accounting Standards Board (SASB)," said Corinne Bendersky, an S&P Global Ratings analyst who helped develop the ESG Evaluation, at the launch event in London.
An ESG Evaluation is an aggregate of two components: an entity's ESG Profile and its Preparedness. The first assesses current exposure, underpinned by our new ESG Risk Atlas, which charts exposure to environmental and social risk for over 30 sectors and provides country scores. The second evaluates not only the ability to anticipate and adapt to emerging or long-term ESG risks, but also to harness ESG-related opportunities.
"While elements of the assessment are very data driven, we also reflect on the fact that the data only tells part of the story, and so we have created an assessment that enables us to apply our own analytic adjustments at the factor, profile, and weighting level," says Bendersky.
Madelyn Antoncic, the CEO of SASB and an S&P Global Ratings board member, echoed this idea at the New York event, stating "it's not quantifiable in a financial way, but it is financial risk. Non-financial risk becomes financial risk."
Speaking at the London event and also stressing the need to view ESG risk as financial risk was Nigel Topping, the CEO of We Mean Business, a coalition of nonprofits that work with businesses to promote the transition to a zero-carbon global economy.
"Framing ESG as a niche issue or investment strategy--as something 'non-financial' – is the greatest hurdle for markets, regulators, and investors to overcome," Topping said. "Just think of the rise of renewable energy, storage, and demand response management affecting power utilities--that's not an ESG issue, but a strategic one."
"According to the Business & Sustainable Development Commission, sustainable businesses have the potential to unlock USD12 trillion in new market opportunities," Topping added. "We need good ESG analysis to act like a radar for navigating the fog of a market going through disruptive change."
Already, studies are showing links between ESG and financial performance, and S&P Global Ratings believes ESG factors can provide valuable insights into current and future risks and opportunities for corporate borrowers. In turn, these issues can lead to a direct or indirect financial impact on an entity.
"Strong ESG risk awareness and management credentials can contribute to improved long-term corporate financial performance and investment returns – particularly when material ESG factors are accounted for and well mitigated," Yann Le Pallec, head of S&P Global Ratings, told attendees in London. "Most pertinent to today's event is the growing need for forward-looking, quantitative, and qualitative analysis, conducted by people with deep sector and company knowledge, to supplement reported ESG data, which is the foundation of our S&P Global Ratings ESG Evaluation."