Daniel Klier, Global Head of Sustainable Finance at HSBC, uncovers the latest key ESG trends, changing attitudes, and shifting strategies through the results of our 2020 Sustainable Financing and Investing Survey.
This year’s HSBC Sustainable Financing and Investing Survey comes at a pivotal moment. ESG has firmly taken root in today’s capital markets, with new strategies, new funds and new financing instruments for sustainability emerging all the time. Many investors and issuers are already active in sustainable finance – with many more intending to become so in the next few years.
Then, right in the midst of a shift towards sustainability, the global pandemic struck, changing how people interact socially, environmentally, economically and politically across the world.
“This year’s Sustainable Financing and Investing Survey is being released at a very interesting time,” affirms Daniel Klier, Global Head of Sustainable Finance at HSBC. “The pandemic has dramatically accelerated change. Companies, governments and policy makers are materially changing their strategies and leaning into a net-zero world. And as our survey makes clear, investors and issuers are stepping into this change too.”
Increased scale and scope
This year’s survey covers 2,000 investors and issuers across 34 territories in four regions.
“That gives us a very broad view of what’s happening right now on a global scale,” says Klier. “And, the fact that this is the fourth year of the survey also allows us to show longer-term trends and shifts in attitudes. What’s also unusual, if not unique, about our survey is that it covers issuers and investors at once. That means we’re able to compare and contrast their views, see which practices are being followed more than others, and map how patterns might differ across industries and geographies.”
The increased scale and scope of this year’s HSBC survey provides a robust snapshot of the market, revealing how environmental and social issues are now extremely important in capital markets. Despite, or perhaps because of Covid-19, 94 per cent of investors say they now consider sustainable finance to be important or very important. What's more, 93 per cent of issuers and 86 per cent say that ESG issues are now either very or somewhat important to their organisation – that’s an overwhelming majority on both the buy-side and sell-side .
What's become apparent is that the world isn’t the same as it was when last year’s survey was conducted. It’s been changed utterly by the pandemic. A great many of the companies that took part in the 2020 survey have been dealing with severe dislocations to their businesses. Given that, the fact that issuers and investors are still so clearly focused on ESG issues is remarkable.
Lowering risks, improving returns
The interaction of these two influences — growing interest in sustainable finance and navigating the pandemic — is evident in investors’ greater focus on performance.
“It’s interesting to see in this year’s survey that one of the main drivers for environmental and social engagement for investors is now risk and return,” says Klier. “Almost half (49 per cent) of investors around the world argue that factoring environmental and social issues into their strategies improves portfolio returns and/or lowers investment risk.”
This is one area of the survey that reveals the profound impact of Covid-19 on sustainable finance. Among investors, 87 per cent say the pandemic has changed how they consider environmental, social and governance issues, while 92 per cent of issuers say it has altered their approach to sustainability.
“I think there are two influences at work here,” says Klier. “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.”
Clearly, the pandemic has made issuers and investors more convinced than ever of the need for sustainability.
Bringing down the barricades
The other good news is that obstacles to broader ESG investing seem to be shrinking.
In the last two surveys, we have asked investors if there was anything holding them back from pursuing ESG investing more fully. This year's results are encouraging, with only 46 per cent of investors globally reported obstacles to sustainable investing.
In 2019, well above half of investors in all regions except Asia felt held back by different barriers. This year, percentages have fallen dramatically across much of the globe. In the Americas last year, 76 per cent of investors felt impeded. This year it’s only 51 per cent. In Europe, it’s almost halved from 66 per cent to 34 per cent. In the Middle East it’s down from 77 per cent to 69 per cent.
Despite, or perhaps because of Covid-19, 94 per cent of investors say they now consider sustainable finance to be important or very important.
In a follow-up question, the survey asked those investors who do still feel impeded, what's holding them back. Respondents cited a lack of demand from clients, regulatory constraints, or their firm being unwilling to go in that direction. The prospect of poorer financial returns was also cited.
Other obstacles are to do with information and skills. 26 per cent cite a lack of expertise or qualified staff, 27 per cent flag poor disclosure by issuers and another 27 per cent complain that ESG definitions are inconsistent.
Searching for consistency
However, the biggest obstacle by far is that a lack of consistency and clarity around sustainable data metrics and data is inhibiting issuers from clearly stating their ESG principles and investors from being able to directly compare the options.
“The survey makes it clear that, of those remaining barriers to investment, the biggest challenge for investors is that issuers’ ESG data is not comparable enough ,” confirms Klier. “Globally, 50 per cent of them find this an obstacle to full and broad ESG investing.
“Clearly, there are still residual concerns there. And with more and more corporates coming into the market, it’s going to be increasingly difficult for market participants to make meaningful comparisons. Unless issuers begin to make easily comparable data widely available, transparency will continue to be an obstacle for investors.”
Disclosures on the rise
Encouragingly, the survey does reveal that market participants across the world are stepping up their disclosure of environmental and social performance, though issuers continue to lead investors by sharing more thoroughly.
In 2019, 17 per cent of issuers said they weren’t disclosing information about their environmental and social performance. This year that proportion has fallen to 6 per cent.
Investors have also improved their disclosures in the past year. The survey asked those who have firm-wide policies on responsible investing whether their policies include specific disclosures. In 2019, just under 25 per cent said they disclosed the ESG characteristics of their entire portfolios. This proportion has now reached 35 per cent globally and goes as high as 42 per cent in the Americas and 46 per cent in the US specifically. These figures can be expected to rise in Europe as EU legislation requiring sustainability disclosures takes effect.
The growing green finance market
This year’s survey also tracks a growing interest in the creation and adoption of new sustainable finance instruments. One of the most successful of these innovations has been sustainability-linked loans (SLLs). A year ago, 75 per cent of survey participants regarded SLLs as very or potentially interesting. This year, 30 per cent of issuers already have experience of SLLs.
More typical green bonds also look set to see investor demand boom. Of the investors who buy bonds of any kind, 32 per cent are buying green and sustainable bonds. And the survey results suggest that investor appetite will increase – 36 per cent of all bond investors who do not buy green bonds yet, fully expect to start buying them seriously for the first time.
The impact of climate change
One of the other most important pieces of research in the survey is about issuers’ expectations of when climate change will begin to affect their businesses. The key change since last year’s survey is that now only 18 per cent of issuers think that it will begin to affect them in the medium term. That figure was 30 per cent in 2019.
Conversely, this year, 27 per cent think it will affect them in the long term. Last year, only 15 per cent did. But the important point here is that over 90 per cent of issuers now expect to be impacted by climate change at some point. Indeed, 37 per cent say it’s already affecting them.
Perhaps one of the most significant questions in this year’s survey is around capital allocation. We asked issuers whether, in the next five years, they expect to change how they allocate capital, either further away from activities that are challenged by environmental and social issues, or further towards activities that promote positive outcomes.
The results are impressive. Last year, 65 per cent of issuers said they expect to make such changes to a notable or substantial extent. This year it’s up to 77 per cent. What’s more, the share that don’t expect to do this at all has halved to just 3 per cent.
What this means is that virtually the whole sector is happy to change where it puts capital for environmental and social reasons.
What lies ahead
Will this strong momentum continue into 2021? “I think the context in which we will be conducting next year’s survey will be very dependent on how the pandemic plays out,” says Klier. “Despite all of the incredible challenges that issuers and investors have faced this year, will they still be willing to double down on their sustainability efforts in 2021?”
That's the question to ask next year. The answer will tell us all something profound about where the world is at that stage, and to what extent ESG and sustainable finance have evolved.
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