By Andrew Wetzlel, CFA®, Managing Director of Sustainable Investing
By all accounts 2021 was a big year for sustainable investing, with asset levels and the number of investment options reaching new heights. Issuance of green bonds and sustainable finance notched another record and there were numerous public listings of environmentally aligned companies through IPOs and special purpose acquisition company (SPAC) mergers. Outside of the public market spotlight, capital formation in private markets continued to run hot, with impact investing a rapidly growing area.
We’ve hit a tipping point in global investment and financing systems, where participants have realized that the structural shift toward a more sustainable world is underway. Consumers are more sensitive to the sustainability profile of the companies from which they purchase goods and services. Governments are becoming more ambitious with frameworks to support the transition toward a sustainable future. Investors are increasingly allocating capital to companies properly managing ESG risks and delivering products and services that meet environmental and social challenges. Companies of all sizes are responding, proactively or due to investor pressure, with greater transparency and accountability.
With tremendous growth and progress across underlying market drivers, a lack of consensus around basic terminology has become a much more significant source of confusion and risk. There were many headlines in the news about greenwashing and misaligned expectations around ESG ratings and desire for impact. All of this has standard setters and regulators paying attention. The CFA Institute released ESG Disclosure Standards for Investment Products in November of 2021, and the SEC created a Climate and ESG Task Force focused on issuer disclosures and ESG investment product and strategy marketing.
As we look forward, we believe 2022 will be the year where market growth and product development will be put to the test as standards and regulations take shape. While we could list many items to keep an eye on for 2022, there are five major factors that should be on investors’ radars, which indicate that the sustainable investing landscape is shifting from early-stage growth to something more mainstream and moving from the why to the how. As the market changes we are not standing still; we are working hard to apply our sustainable investing framework to a broader set of investment options with our new teammates from Atrato and are developing an expanded set of sustainable reporting capabilities, among other initiatives. All of this is an effort to stay leading edge for you, our valued clients. We look forward to sharing more about our expanded platform throughout 2022.
Five factors that point to a shifting landscape
↪ Getting closer to a common language. The CFA Institute ESG Disclosure Standards for Investment Products outline terminology recommendations broadly covering ESG Integration, screening, thematic investing, and impact investing. We expect the investment industry to begin aligning with these standards in 2022.
↪ Improved corporate reporting. The SEC is working through public comments related to climate disclosure and has indicated broader changes covering a wider range of ESG topics to improve transparency, consistency, and comparability of information. The days of glossy CSR reports are numbered.
↪ Greenwashing becomes seriously risky. The SEC division of enforcement is actively evaluating
investment manager ESG claims and marketing materials to ensure these are accurate and consistent with internal firm practices. Substance and true expertise will stand apart in 2022.
↪ Corporations will have to execute on commitments. The number of companies with carbon-neutral targets more than doubled in 2021 and now investors want to see action and real progress toward goals. Credibility of targets and action plans will be in the spotlight.
↪ ESG integration in private markets. A group of large private equity firms and institutional asset owners (investors) launched an effort to aggregate and standardize ESG data across private companies. ESG integration is likely to become a significant area of focus in private investment diligence in 2022.
A Banner Year for Green Det Issuance in 2021
According to Bloomberg, green, social, sustainability, and sustainability-linked corporate and government bond sales rose to $1 trillion in 2021, which is a massive 108% increase from 2020. Bonds specifically labeled “green” totaled $527 billion compared to $246 billion in 2020. While the US has lagged Europe in ESG integration and issuance, there have been some recent notable developments. In November, Ford Motor Co. sold $2.5 billion of green bonds, the largest green bond deal ever from a US corporation (Bloomberg). The proceeds will be used exclusively for clean transportation projects and for the design, development, and transportation projects and for the design, development, and manufacturing of its battery electric-vehicle portfolio. In the municipal sector, green debt issuance could be boosted by the Infrastructure Investment and Jobs Act, which will encourage municipal governments to undertake previously shelved projects. 2022 will undoubtably be another booming year for green debt, with issuance even spreading to the High Yield and Emerging Market sectors. Notably, we are finding instances where the yield difference between green and traditional bonds is negligible and will look to add them to client portfolios where appropriate.