ESG is on a growth spurt. In fact, it’s grown exponentially in the last few years. In Europe ESG financing represented close to 20% of the total bond issuance in the first half of this year, for example.
The factors behind this astonishing success are explained by Cristina Lacaci, Managing Director of Global Capital Markets at Morgan Stanley, in the second episode of Kantar’s Sustainable Futures podcast.
Talking to Jonathan Hall, Managing Partner of Kantar’s Sustainable Transformation Practice, she says that not only has there been a very significant increase in the number of sustainable and impact funds but that conventional investors are also incorporating Environmental, Social and Governance factors into their investment decisions too.
“They now want to understand, for example, what the energy transition means in terms of opportunities for a company, or how a company is mitigating ESG risk. And this trend will continue. I think it will actually accelerate in the coming years,” she says.
One of the big drivers has been younger investors. Cristina cites a survey conducted by the Morgan Stanley Institute for Sustainable Investing last year, asking individuals about their preferences. Over all four in five individuals showed a preference for sustainable investing and among Millennials the figure was 99%.
Cristina says it’s important to remember that ESG financing comes in a number of forms:
- Bonds or loans – An amount equal to the net proceeds needs to be allocated to environmental projects. This could be investments in renewable energy, investments in electric vehicles or it could be projects to improve the energy efficiency of a company. For social financing it could be affordable housing, education or it could be access to medicines.
- Sustainability linked or KPI-linked instruments – With these instruments, if the issuer does not meet an ESG target, such as the reduction of emissions, or a diversity KPI, then the cost of the financing could vary. If you don't meet your target the cost could go up.
- Sustainability funds – funds where the main objective of the fund is an environmental and/or social objective. There are also other funds, where they take ESG considerations into account, normally called ESG Integration.
Meeting investor demands
For investors to back companies in any one of these ways, however, Cristina says they need to meet three criteria.
The first is that efforts need to be authentic, sustainability needs to be aligned with the corporate strategy. Top management cannot have a different message to the one coming from the marketing team or any business unit.
The second is that they need to understand how ESG creates value for the company, both in terms of the opportunities and the revenues, but also in terms of the mitigation of risk.
The final factor is the need to see data. Smart investors want to know what metrics are being tracked and how the company plans to achieve its goal.
“[Data] is hugely relevant, because I always think that ESG is really about the journey and about making sure that each year you can show that you're improving on your environmental and social metrics,” she says.
For now, however, there is a lot of focus on regulation, in terms of disclosure for investors, in terms of disclosure for corporates, but also in terms of managing climate risk and specifically, a climate stress test for banks.
In the medium term, she predicts there will be much more integration of financial and non-financial considerations. So, ESG and sustainability will become much more deeply embedded in the way we communicate around the company, but also in the way we conduct our day-to-day business.
Sustainable Futures is the sustainability podcast from Kantar. In each of our episodes, we speak with senior experts from a wide variety of disciplines to bring broad understanding to complex topic areas and shine a light on the most pressing sustainability issues facing business and marketing. All designed to help marketers create sustainable futures for your brands and business.
Listen to past episodes here, and you can listen wherever you normally get your podcasts.