The vitality of the UK’s equity markets has waned in recent years. Long-term trends, including the country’s shrinking role in the global economy, coupled with the more immediate fallout from Brexit, have robbed London of its status as Europe’s leading share-trading hub, a position now held by Amsterdam.
UK listings, meanwhile, have collapsed by 40% since 2008, according to the recently published Listing Review.But the country’s financial regulators, law-makers and officials are alert to these problems.
Speaking in May 2023, Sarah Pritchard, the Financial Conduct Authority’s (FCA’s) executive director for markets, noted: “Many of the rules that underpin the UK capital markets are historic, formed in the 1980s, and we cannot afford to stand still. […] we must continue to evolve – and in some areas – evolve rapidly.”
In the dynamic landscape of today's business world, companies are increasingly realizing the importance of ESG factors in driving long-term success and creating value.
As societal expectations continue to evolve, investors, consumers, and regulators are placing greater emphasis on ESG performance. To navigate this shifting paradigm and secure a sustainable future, businesses must embrace ESG transition planning as a strategic necessity.
ESG transition planning entails a methodical approach to integrating ESG considerations into a company's fundamental operations, strategies, and decision-making processes. It goes beyond mere compliance and strives to embed sustainability and responsible practices throughout the organization, at all levels. This proactive planning empowers businesses to adapt, thrive, and seize opportunities in a world increasingly focused on sustainability.
In a regulatory environment that is increasingly statutory, ESG transition planning is no longer an optional pursuit, but a crucial one for businesses aiming for long-term success. Embracing sustainability, responsible practices, and engaging stakeholders proactively are essential for navigating the complexities of today's world. By incorporating ESG considerations into their strategies and operations, companies can enhance resilience, drive innovation, attract investment, and make a positive contribution to society and the planet. Ultimately, ESG transition planning paves the way for sustainable growth, ensuring a prosperous future for businesses and the communities they serve.
To learn more about how the ESG Disclose team, in collaboration with their local partners, has successfully assisted clients in developing and implementing ESG Transition Plans, please contact info@esg-disclose.com.
Many of you will have read corporate sustainability reports or seen press releases from large companies who have set sustainability and climate change goals and published ESG-related data in 2021. Investors, regulators, and the broader public are exercising greater scrutiny of corporate sustainability efforts, calling out what they perceive as greenwashing. Much of this scepticism is founded on concerns that companies may be using disclosures and sustainability-related labels on products and services as a marketing tool to appear more proactive on those issues than they truly are. I strongly believe that the pressure on corporates and governments will increase to publicly disclose live data beyond long term goals such as “Net Zero” by 2032. The investing public and financial institutions want to see annual progress to achieving these realistic targets. They want to see the actual steps companies are taking to achieving these goals through consistent presenting of milestones towards these goals.
Investors are putting real pressure on their portfolio companies to not only provide ESG Sustainability Annual Reports but also to demonstrate real progress towards these goals and are making significant structural changes in their portfolios. For example, BlackRock anticipates that 75% of its corporate and sovereign assets will be in issuers with science-based net-zero aligned targets by 2030. Another example is that of 500 Start-ups, one of the largest Southeast Asia-based venture capital funds implements ESG screening & monitoring across their portfolio which includes unicorns like Grab, Carousell, Bukalapak & Carsome[1]. Investor adoption of ESG ratings for portfolio management has accelerated reporting globally. ESG investments represent a shift toward supporting companies that consider long-term sustainability as part of their operations, while also acknowledging the risks of unintended outcomes that could happen if an organization were to fail to take ESG factors into account.
Investors need to consider the following when evaluating the ESG strength of an investment:
Investors need to review the actions taken by companies surrounding current most pressing issues such as pollution (i.e. oil spills, release of toxic chemicals, greenhouse gas emissions), use of environmentally-friendly products, implement circular economy concepts for waste management, organic components in daily operations, land use and how operations contribute to land conversion, waste generation and disposal, and the exclusion of activities like fossil fuel extraction, animal testing, nuclear energy, genetically-modified organisms, palm oil and tobacco growing, among others.
Many companies already use technology to collect and report this data and most companies already report this data to regulators such as the Environmental Protection Agency (USA) and Environment Agency (UK). Much of this data is in quantitative formats and can be used to present the data for reporting frameworks as the Global Reporting Initiative (GRI) and Carbon Disclosure Project (CDP). Selecting the appropriate framework is very much sector driven and the perceived maturity of the reporting organisation (see diagram above). ESG reporting frameworks are designed to meet the needs of their intended audience. This makes them weak at addressing the needs of the other groups. For example, governments cannot effectively use the ESG reporting frameworks designed for investors. Likewise, the ESG frameworks designed for governments cannot be used by management. Frameworks provide a structure for common reporting and benchmarking but require consolidation for them to become meaningful and useful for all stakeholders.
Data in this domain can be subjective and much of the data is qualitative. Social includes community outreach and support, labour conditions of employees and workers involved in the supply chain, diversity in the workplace and how that is encouraged during the employee selection process and retention/promotion efforts, community development, gender aspects, occupational and community health and safety management, and the exclusion of activities like gambling, controversial weapons, alcohol, and adult entertainment, among others. The use of sanctioned materials used by a company, for instance, illustrate the importance of supply chain working conditions. By and large this data set is open to subjective judgement and requires rigorous auditing and assurance.
Data collection and assurance includes aspects like the composition of boards of directors, the existence of potential conflicts of interest, transparency about policies in place, application of codes of ethics, anti-corruption provisions, grievance mechanisms, adherence to company values, reporting arrangements, norms-based screening, and cybersecurity risk management procedures, among others. The data sets are a mixture of quantitative and qualitative data and require companies to invest heavily to not only assess where they are in respect of their chosen reporting framework but ensure that they can report their progress annually.
Companies with a strong ESG track record instil a sense of confidence and belief in investors, employees, suppliers, and business partners. This trend is likely to intensify as the new generations that grew up with greater levels of social and environmental awareness, such as Gen Y (Millennials) and eventually Gen Z, become involved as investors in the stock market.
Competitors that fall behind in upholding the ESG factors that are increasingly important to investors, the government, and society, risk facing a critical business risk. With a growing gap between the values of those stakeholders and the business practices of such companies, could encourage many stakeholders to look for opportunities to work with and invest in companies with better ESG records.
Corporates are required by their stakeholders and customers to move beyond setting long term sustainability goals and to be able to demonstrate with ongoing regular evidence that they are moving to Net Zero. Our future generations need us to mitigate and repair the damage of 200 years of industrial development through developing technologies that provide insight into our impact and enable us to make sustainable decisions now and for the future.
Nadeem Shakoor, COO, ESG Disclose
[1] *Sources: Reuters, Deloitte, UNPRI research
Our Head of ESG Development & Strategy, Kalyani shares her insight of impact of ESG on the finance and fund management. Here she shares her thoughts in the Journal of Environmental Investing.
“Defining Climate, Green, and Environmental Finance”
While climate finance is generally understood as the financing of assets and activities supporting climate change mitigation, the term climate finance in its current context is mostly aimed at financing or funding those technologies or activities that aim at reducing harmful emissions of greenhouse gases, and the atmospheric warming caused by the latter. It also indirectly aims at increasing the resilience of human and ecological systems to rapidly change negative climate change impacts.
Albeit the authors indicate that climate finance can be considered as a subset of environmental finance, in the current context the term environmental finance is mostly aimed toward financing and investing in the preservation of ecological systems and the environment, such as the management of solid waste, biodiversity issues (for example, landfills and hazardous waste, land remediation, and so on). Climate finance has mostly been distinguished from both ecology and ecological economics.
The authors did specify green and sustainable finance as important tools, as well as their importance, given the persisting urgency to fully transition to a sustainable economic model. However, in the upcoming EU policy and regulatory definitions, sustainable finance is referred to as any form of financial service integrating ESG (Environmental, Social, and Governance) criteria into business or investment-making decisions. Generally, this includes economic activities that ensure and improve economic efficiency and sustainability in the long term. Current activities that fall under green and sustainable finance include, among others, microfinance, funding for green bonds, sustainable projects (mainly those that overlap with project finance activities and follow the equator principles). In summary, it aims at gearing the whole financial system in a more sustainable direction.
A Comment on “Defining Green Bonds”
Climate bonds are fixed-income financial instruments that can be linked to climate change solutions, although not exclusively. They are most commonly issued by governments, investment banks, municipalities, or corporations.
While there is a need for $36 trillion of clean energy investments, the authors could have provided additional details such as the ratio of green bond capital to be raised in both developed and developing nations. According to recent scenarios, emissions and energy demand are both likely to double; hence it is crucial to calculate the break-even thresholds to estimate the minimum capital to raise and indicate the country-level or continental variances.
While it was quite interesting to know that private equity and venture capital can be sources of finance, it is also imperative to recognize other stakeholders in this value chain for the purpose of meeting the UNFCCC’s annual $100 billion investment target. I would have stated that insurance companies, investment managers, pension funds, non-pension fund assets, foundations, and endowments all share equal responsibility to achieve these targets.
A Comment on “The Market for Green Bonds”
As of 2019, the United States, China, and France are leading national issuance rankings. According to the Climate Bonds Initiative, the 2019 volume was primarily driven by the wider European market, which accounted for 45% of global issuance. Asia-Pacific and North American markets followed at 25% and 23%, respectively. In 2019, the total amount of green bonds issued in Europe increased by 74% (or USD49.5 billion) year-on-year, reaching a total of USD116.7 billion.
It is evident that the overall market share for green bonds is increasing on a year-on-year basis. It might have been more helpful if the authors could have elucidated on the different stakeholders’ contributions in this value chain through, for example, financial intermediaries, blended finance, and institutional investor-level fundraising. Additional insights regarding those classifications would have been quite helpful.
A Comment on “Anthropological and Sociological Theory on Green Bonds”
The review might have benefited from a few more lines on social theory and what level of input is required to help mitigate the challenges posed by climate change. Since the authors have referenced how anthropological studies have influenced green bonds, it would have been even more important to expand further on the different disciplinary methodologies and to what extent timescales have been involved. For example: What went right and wrong so far? On what timescales were those anthropological studies conducted?—meaning, were they shorter or greater than a decade ago, or did they cover much more extended periods?
Is it important to know if the data are quantitative, qualitative, or both? And what geographical locations have been of greater importance so far in helping the green bonds market mature? While it is great to know that the study of anthropology provides valuable insights for the scientific community, it is of higher relevance to establish metrics more directly linked to contemporary climate issues. These include the success rates of past adaption and mitigation measures, and also what lessons can be drawn from these so far. Explaining anthropological theories in this context would have generated substantial additionality.
A Comment on “The Translation of Climate Science into Finance”
Adhering to stricter legal frameworks, as well as business codes of conduct, is a key element in scaling climate finance. While the authors outlined the benefits of complying with existing industry product standards such as the Green Loan Principles of the Loan Market Association (LMA) and the sustainability bond guidelines of the International Capital Markets Association (ICMA), it would have been useful to also illustrate the role of external assurances where required, using appropriate benchmarks and adequate sustainable product definitions. These usually help to minimize greenwashing or reduce the risk of translating climate science into finance. However, the importance of extra due diligence and the participation of third-party verifiers for identification and evaluation purposes are also key aspects to be considered.
A Comment on “The Policy Significance of Green Bonds”
The authors have pointed out that having solid policies in place is seldom a barrier to the development and scaling of the green bonds market. However, additional coverage of the conflicting policies and practices in developing countries would have strengthened the paper, including how these policies have acted as a barrier so far, and what until now could have been done to improve this situation.
Readers might also have been interested to know that there are a variety of different climate-change-related risks which can cause asset stranding, including falling clean technology costs or new government regulations, such as carbon pricing (for example, carbon taxes). Policy frameworks are playing a vital role in decreasing these risks. Proper coordination between the ministries of finance and the ministries of environment during bond issuance can act as a catalyst to issuance growth.
The central role of the TCFD is valid, but it would have been nice to have more supporting studies on how this framework has positively impacted developing countries. This could be another topic for further green bond markets research.
A Comment on “Green Bond Market Governance in the Legal Literature”
In the discussion, while it is evident from Banahan (2019) that Green Bond Verifiers (GBVs) share many features with credit rating agencies (CRAs), it is imperative to understand how this situation could lead to conflicts of interest. Hence, this potential issue could be explored in more depth. Reputation across issuers is not equally distributed, with some studies highlighting the crucial role of issuers, who pay for the certifications (Becker and Milbourn 2011).
One of the main differences that has been highlighted was that CRAs are required to disclose methodologies’ data assumptions to a certain extent and consistency in the application of ratings. In contrast, GBVs are not subject to such requirements, which could facilitate underlying potential conflicts of interest. The listed regulations made it imperative for CRAs to disclose their credit rating methodologies in response to the 2008–2009 financial crisis.
Green bonds are enjoying heavy growth and are now available in more than 20 countries. China, Brazil, and India have all released their respective policies and guidelines in this space. It is critical to evaluate how the standard-setting regimes, legal structures, and governance standards differ between jurisdictions, including those of the United States, European Union, and China, as these are leading in green bonds issuance.
Most of the countries have been developing or have developed their own regulatory structures for their respective green bond markets. However, for the sake of consistency, it would be preferable to have a certain degree of consistency between all of them. It is important to implement prominent guidelines such as the Green Bond Principles (GBP), established by ICMA, to help guide issuers in setting up credible green bonds. The GBP’s suggested process guidelines seem to be, in my opinion, especially applicable to both GBVs and CRAs. The guidelines include the following steps:
The authors should have elaborated more on transparency instruments, such as establishing a Green Standards Committee (GSC), as described by Banahan (2019), which could offer a great level of critical assurances to environment-focused investors by providing clarity, oversight, and accountability in the accreditation process. Moreover, it could have proven helpful to have a more in-depth look at how a GSC would oversee the market and provide assurances about verifiers not engaging in risky behavior, and how that could have helped prevent the 2008–2009 financial crisis.
In this context, I would like to mention the emergence of blockchain technologies, which could constitute an important tool in enabling green bonds to grow and increase their credibility and transparency. The authors’ message of using blockchain in fostering these positive trends is not fully clear. More evidence and examples are needed to obtain a better understanding of how these novel technologies help enforce green bond regulations and enhance trust in green financial markets. These technologies are at an early stage of development, and it might prove hard to predict their future trajectories. Hence authors could have provided recommendations to help policymakers identify and recognize the potential behind these technologies.
A Comment on “Pricing Research on Green Bonds”
On average, the market for green bonds is still reasonably small in size compared to the one for vanilla bonds. This could make green bonds less liquid than other bonds with similar or identical credit ratings. A few additional lines from an issuer’s perspective in relation to the potentially higher issuance costs would have proven useful, since these are primarily caused by labor-intensive reporting requirements that involve third-party verifiers. The additional procedural steps in the green bond issuance process can actually render them more expensive than conventional vanilla ones. For example, investment banks generally charge more to issue green bonds. New regulatory initiatives on the horizon, most notably in the EU, which is planning the introduction of green-bond-related issuance and reporting requirements, could lead to additional cost increases. At a global level, there is still a lack of clear guidance on what activities or projects increase the need for clear definitional frameworks for green bonds, similar to the EU’s planned green taxonomy and green bond standards.
A Comment on “The Legal Consequences of a Greenium”
The authors have clearly stated the risk of greenwashing, especially via financial product offerings such as green bonds and green loans, which in some cases can lead to litigation. However, the other potential key risks of interest that were missing are “reputation risk” and “compliance risk.” These represent material risks, notably if the issuer or borrower has failed to identify that the raised funds have been misallocated. Possible scenarios include, for example, insufficient evidence about how funded projects contributed toward positive environmental impacts or improperly tracked and inefficiently disclosed green bond proceeds. These shortcomings can damage the issuer’s reputation and entail further legal proceedings with regard to the misrepresentation of risks and impacts.
It would have been interesting to see a more extensive exploration of whether green bonds can be considered as a separate asset class. There are a number of different approaches and standards being used to establish eligibility in the global labelled green bond market. At the moment, there are no mandatory green bond standards, and market actors are free to choose what and how these different approaches are applied, which can potentially turn into a systemic risk. This aspect could be explored in any further academic research on green bond markets.
A Comment on “Future Research Avenues and Anthropology”
While anthropology, law, and policy should remain key research areas on green bonds, another promising area would be archaeology. In my opinion, archaeologists help to understand the dynamics of how the earth and communities evolve or adapt after natural calamities, which often lead to material or structural post-disaster changes. The authors should consider this angle in their future research.
A Comment on “Policy”
The authors could have put additional emphasis on the importance for policymakers to clearly understand how to mobilize sufficient debt and equity capital to catalyze the transition toward low-carbon and climate-resilient economies.
A Comment on “Law”
While the authors’ views expressed in this section are quite interesting, I am suggesting a further investigation into the following questions in any follow-up academic research:
Conclusion
Overall, the original article might have benefited from a more detailed explanation on how green bond principles support the identification of more granular criteria. Specifically, those criteria concerning the use of the bond proceeds as a way of helping to identify truly green projects and setting out these as a requirement rather than just as a voluntary principle.
Readers might also have benefited by understanding whether a global standard is possible or applicable. Or if more regionalized standards tailored for specific geographies will be more beneficial to countries. Will the upcoming EU standards have a ‘first mover advantage’ and transform into the de facto new global standard? For example, China has adopted its own approach, which could potentially pave the way for other countries, too, to implement their own standards. These green bond policy aspects require further research.
Finally, I would have loved to see the authors put more emphasis on the inherent weaknesses of green bonds, including the perceived lack of actual cost of capital advantages for the issuer, and whether these activities would have been financed anyway in the absence of the green bond label.
In conclusion, I recommend further discussions on the alternatives to green bonds and how to use green bonds’ proceeds more effectively, for example in the form of Green Asset Backed Securities (ABS) or Green Infrastructure Bonds, since both of these categories appear to be more narrowly defined and thus overall less susceptible to greenwashing.
Full Reference: https://www.thejei.com/comments-on-a-multidisciplinary-literature-review-of-academic-research-on-the-green-bond-market/
