ESG Investing  

What clients need to know about ESG investing

  • Explain the key terms around ESG investing
  • Identify the key reasons for investing responsibly
  • Identify the organisations and initiatives looking to drive change

Since the Global Financial Crisis, a prolonged period of loose monetary policy has primarily benefited the baby-boomers, the post-war generation born between 1946 and 1964, who have seen the value of their assets buoy.

However, within the next five years, their millennial children, those born between 1981 and 1996, should make up around 75 per cent of the global work force.

The millennial generation has far greater concern for conscientious and discerning purchasing power, so the companies they engage with are preparing for the imminent future by investing sustainably, evolving their business models in a bid to stay relevant.

Europe, especially, is blazing a trail of rapid corporate and societal change. 

Reduced performance has historically been cited as a reason for investing elsewhere, though this is no longer an argument that is accepted by all. In the last five years, ethical indices have outperformed their non-ethical counterparts. 

Some of the outperformance can be attributed to the demise of unpopular ‘sin-stocks’.

But it’s not all about equity; the rise of pioneering green bonds coincides with increasing investor appetite to incorporate ESG factors into their portfolios.

The European Investment Bank issued the first green bond in 2007, since then the World Bank and numerous others have followed in their steps. 

Green Project Bond proceeds are used to fund environmentally friendly projects such as clean water infrastructure, renewable energy and pollution prevention and control. Increasingly popular with responsible private investors, charities and institutions, the value of annual issuances has climbed from $2.6bn in 2012 to a predicted $200bn by the end of 2019.

A Green Revenue Bond finances a specific income generating municipal project, such as a toll bridge and is therefore considered riskier due to the single revenue stream. 

Green Securitised Bonds on the other hand are collaterised by one or more sustainable assets. 

Securitisation is the fastest growing product in green finance and the Organisation for Economic Co-operation and Development (OECD) has estimated that the issuance of green ABSs could reach $380bn annually by 2035. 

These bonds are bound together by The Green Bond Principles (GBP), issued by the International Capital Market Association (ICMA), as a set of guidelines that recommend transparency and disclosure and that promote integrity for green bond issuance.

There are four core components: 

  1. Use of proceeds
  2. Process for Project Evaluation and Selection 
  3. Management of Proceeds 
  4. Reporting 

ESG in application 

If what you have read so far appeals to your agenda, here are some considerations that will ensure your investments and ethical judgements align:

Shareholders have a responsibility to engage with corporates (the guardians of investor capital) to drive change. 

The Stewardship Code (2010) lays out principles for institutional shareholders who hold voting rights to act in the interest of beneficiaries.