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    Environmental, social and governance (ESG) issues have long since made the jump from trend to global cultural shift. There are new strategies, new funds and new financing instruments for sustainability emerging all the time and the pace is accelerating. Where once, considering ESG principles when investing or issuing debt was a niche endeavour, today it’s a core element of capital markets.

    This year’s global survey of 2,000 market participants found that over 90 per cent regard environmental and social issues as important. This surety of the importance of ESG was present for both issuers and investors across varied regions: from Asia to the Americas and Europe to the Middle East.

    And the good news is that obstacles to broader ESG investing seem to be shrinking. In 2019, 61 per cent of investors globally reported obstacles to sustainable investing; now less than half (46 per cent) do.

    But in the midst of this shift towards sustainability, the global pandemic struck, and it has changed how sustainability is viewed, both positively and negatively.

    The effects of the pandemic

    For many people, the Covid-19 pandemic has brought a reckoning and reassessment of their lives and there is firm interest in the idea of a “Great Reset” that will change how people interact economically, socially, environmentally and geopolitically across the world.

    In this atmosphere, it is not surprising that nearly 30 per cent of all investors (and 40 per cent in Asia) say that the pandemic has strengthened their commitment to considering ESG factors. Of issuers, 41 per cent now believe even more strongly that becoming sustainable is important.

    But while the pandemic itself has strengthened the ideas behind ESG principles, its economic effects have weakened commitment to change, at least in the short term. Last year, 94 per cent of investors considered environmental and social issues to be somewhat or very important. But this year, that figure dropped to 86 per cent.

    Nearly half of investors around the world (49 per cent) believe that taking environmental and social factors into account can improve returns and/or lower risk. However, 17 per cent say that ESG investing involves accepting lower return or higher risk. In 2019, that idea was only supported by 12 per cent of investors.

    There are two influences at work: the pandemic is accelerating the cultural shift towards sustainability, while the adverse economic effects of the pandemic are prompting investors to focus more on their bottom line.

    Temporary or permanent?

    The real question is how much longevity either of these pressures will have. Only 2 per cent of issuers and 1 per cent of investors said they would place less importance on ESG issues permanently as a result of Covid-19. When assessing the impact of Covid-19 on intent, investors and issuers feel more strongly committed to ESG. Moreover, they will interpret these issues more widely. Large numbers of respondents, including 38 per cent of issuers and 23 per cent of investors, conclude that they had previously paid too little attention to the social aspect of ESG.

    These figures suggest that, given a return to normal market conditions, the greater effect of the pandemic will be to further accelerate sustainability, even if this issue takes a backseat in the near term. But how these responses develop will be an important measure of both market recovery and ESG investments in 2021.

    Although investors may be having short-term doubts about ESG, issuers and their capital providers are very clearly not. Globally, nearly all issuers, at 97 per cent, expect to redeploy capital in response to environmental and social challenges and opportunities over the next five years. A third (32 per cent) will make substantial changes and nearly half (45 per cent) expect noticeable changes.

    This drive isn’t just coming from issuers themselves, but from their shareholders, bondholders and bank lenders, who they see as increasing focus on environmental and social performance. Issuers believe that only 2 per cent to 7 per cent of their capital providers are indifferent to these issues, while 65 per cent to 75 per cent think they are significantly interested.

    The growing green finance market

    This strong interest in sustainable financing is also driving the creation and adoption of new instruments. One of the most successful of these innovations has been sustainability-linked loans (SLLs). They can be used for any purpose, but the borrowing company is incentivised to raise its ESG performance by the prospect of lower interest margins if it hits pre-agreed targets – and higher ones for underperformance.

    A year ago, 75 per cent of respondents globally regarded SLLs as very or potentially interesting. Now 30 per cent of issuers say they already have experience of SLLs or green loans. This compares with 40 per cent of issuers saying they have raised debt through the longer established product of green, social and sustainable bonds, in which the proceeds must be used for specified purposes. A third of issuers also say they view ESG-linked and green loans as interesting and may finance through them in future.

    Bolstered by the success of SLLs, sustainability-linked bonds are starting to come to market as well and if this interest continues, both these new forms of finance are likely to continue to expand.

    More typical green bonds also look set to see investor demand boom. Of the investors who responded to our survey and buy bonds of any kind, 32 per cent are buying green and sustainable bonds. Of these, 44 per cent expect to increase their purchases of this product, 45 per cent will keep their allocations steady, and only 11 per cent expect to reduce purchases.

    But the big opportunity is the 36 per cent of all bond investors who do not buy green, social or sustainable bonds yet, expect to start buying them seriously for the first time. That suggests investor appetite for this paper will at least double.

    New priorities in a post-pandemic world

    While overall engagement with sustainable finance has risen quite strongly over the past year, the drivers behind issuers and investors’ focus on the environment and society appear to have changed. This shift reflects both the impact of the pandemic, and, potentially, speaks to the mainstreaming of sustainable finance.

    Last year, 62 per cent of investors said that they were focused on environmental and social issues because of their own or their company’s values. But this year, risk and return and external pressures outweigh those values, with this driver falling to 38 per cent. Issuers have also seen a small decline in values as a driver, from 65 per cent in 2019 to 55 per cent this year.

    It’s possible that this changed focus has much to do with the impact of the pandemic and its resultant economic pressures. But this may also be a sign that sustainable financing is transitioning to a mainstream asset class and becoming just one aspect of capital markets.

    There is also a new weight given to external pressures, which reflect the wider societal shift towards sustainability. Issuers cite external demands as second only to values, with NGOs or pressure groups influencing 34 per cent and customer expectations affecting 33 per cent. Investors feel a similar weight, with 43 per cent citing social expectations as an important driver of sustainability.

    Remaining challenges to overcome

    Both investors and issuers have shown strong commitment to sustainability, but there are still obstacles in their path. The main deterrent is still, as it has been for some time, around data and transparency.

    Investors remain dissatisfied with the quality and availability of ESG data — particularly in the Middle East, where 36 per cent feel obstructed by this lack. But a larger problem is that investors feel issuers’ ESG data is not comparable enough. Half of investors globally find this an obstacle to full and broad ESG investing and institutions in the Americas (56 per cent), the Middle East (55 per cent) and France (58 per cent) feel particularly strongly about this.

    Disclosure, in its methods and its measures, remains a challenge for issuers also. A full one in six issuers surveyed in 2019 was not yet disclosing information about its environmental and social impact, but this proportion has shrunk to just 6 per cent this year. In 2019, only 24 per cent of investors disclosed the ESG characteristics of their whole portfolios. But this proportion has now reached 35 per cent globally, 42 per cent in the Americas and 46 per cent in the US. Just 11 per cent of all issuers surveyed believe they disclose too much, though this rises to 19 per cent in Asia.

    Nearly half of issuers (46 per cent) expect to increase current levels of disclosure, either through their own initiative or to satisfy demands from investors or regulators, a slight increase from 42 per cent a year ago. But the proportion of these that welcome it has fallen, from two-thirds in 2019 to just over half in the 2020 survey.

    They also show little signs of coming together to provide meaningful and comparable data for investors. Sustainability strategies are the most common type of disclosure, published by 96 per cent of issuers worldwide. But these documents are a loose requirement, easy for companies to fulfil.

    More regimented disclosures have not been widely adopted. For example, only 54 per cent are following the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and only 28 per cent of issuers disclose these through their annual reports. This is an improvement on last year, but unless issuers begin to make easily comparable data widely available, transparency will continue to be an obstacle for investors.

    Data, guidance, and insight

    Although perhaps less focused on ESG in the very near term, investors are increasingly accepting its importance. Over half of investors globally have a firmwide policy on these issues, at 51 per cent, and a further third intend to develop one.

    However, once more, they are showing a strong appetite for data to guide them. A similar 51 per cent of investors are seeking advice and information on ESG, with 49 per cent of institutions eager for insight into how the economy is likely to respond to climate change. Nearly half of all investors also want to hear more about the fundamentals of environmental risks and problems (48 per cent), 46 per cent want advice and information on measuring the impact of their investments and 45 per cent want to know how to invest in alignment with the UN’s Sustainable Development Goals (UN SDGs).

    Taken together with investor concerns about data comparability from issuers – with 50 per cent of investors globally finding this an obstacle to full and broad ESG investing – a pattern emerges of investors who are clear on the why of ESG investment, but need help on the what and the how. It is apparent from our respondents that common standards across ESG data and reporting are vital.

    The year ahead

    ESG considerations and sustainable finance have taken root in the financial system. These no longer appear to be trends or niche products, but a wide cultural shift that is being accelerated by the global pandemic. As demonstrated in our survey, many investors and issuers are already active in sustainable finance and many more intend to become so in the next few years.

    However, the road ahead still seems bumpy. There is still a lack of clarity around sustainable metrics and data that is inhibiting issuers from clearly stating their ESG principles and investors from being able to directly compare the options.

    More pressingly, the global pandemic is continuing, and the final toll remains unknown. Both investors and issuers will have immediate challenges to meet that may take precedence over ESG principles.

    But, while the near term is hard to quantify, the longer-term impact of Covid-19 appears to be a desire for renewal and rebuilding. The “Great Reset” may be the most powerful boost to sustainable finance yet.

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