Analysis of the sustainability-linked bond (SLB) market by the Anthropocene Fixed Income Institute (AFII) has found a larger number of bonds will meet their sustainability performance targets (SPTs) this year than in 2023. To support investors in assessing the SLB market, the AFII reviewed 24 bonds to estimate the likelihood of their reaching or missing their SPTs. According to the think tank’s analysis, 14 bonds bonds already have or are likely to meet their SPTs. Four bonds, including ones issues by Coca-Cola and Eni, have a 50:50 chance of meeting them, while three bonds are unlikely to achieve their targets. The AFII noted that even if targets were missed, there could still be benefits for investors and issuers if the reason behind the failure was higher ambition for the bond. “We find that the SLB market continues to drive forward transparency and accountability, and offers an opportunity for investors to use fixed-income capital to support borrower-level transition,” the AFII said. The research also flagged that while overall volumes of SLBs have not yet regained the peak of 2021, issuances remain “significant for a product that emerged just five years ago”. SLBs’ usage, however, does remain frequent in high-emitting and hard-to-abate sectors – including industrials.
Sustainable Investor
News in Brief
The EU’s ESG regulatory framework has contributed to a rise in sustainable investing, but greater clarity and improvements are still needed, the CFA Institute has said. A new survey listed greenwashing risk, lack of reliable data and clear definitions, and ESG ratings complexity as top concerns among CFA investor members, highlighting ongoing challenges with regulations including the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation. One in three survey respondents (36%) said the disclosure requirements under Articles 8 and 9 of the SFDR were too complex and made it hard for retail investors to fully understand the degree of sustainability impact for funds in which they are considering investing. Just under a third (32%) also said it was difficult to compare between ESG products as disclosures weren’t standardised and comparable across jurisdictions. “This survey of our EU members represents the views of financial professionals across the ecosystem, from large asset owners to boutique asset managers,” said Josina Kamerling, EMEA Head of Regulatory Outreach at the CFA Institute. “While a broad consensus exists that the EU regime is advancing the international agenda on sustainable finance, a similar proportion feels that EU efforts are confusing, and the lack of reliable ESG data does not make it worth integrating ESG considerations in investment decisions.” Kamerling described this as a “worrying” finding, arguing that regulators should pay attention to feedback from investment practitioners. “While members want EU regulators to continue to drive the international agenda on sustainability, they also want a focus on more tailored legislation around ESG disclosure requirements to ensure alignment with investor needs,” she added. The CFA Institute drew recommendations for the incoming EU Parliament, including providing clear and consistent ESG terminology throughout the entire legislative framework on sustainable finance, clarifying fund categorisation and disclosure requirements under the SFDR, and addressing the complexity of ESG ratings and divergent methodologies used by providers.
US-based Principal Asset Management (AM) has launched the Global Sustainable Food and Biodiversity Fund, bolstering its commitment to provide thematic products that meet market demand. The fund, classified as Article 9 under the EU’s Sustainable Finance Disclosure Regulation, aims to offer capital growth through investments in companies committed to sustainable agriculture and food security. Aimed at both institutional and retail investors globally, the vehicle will use fundamental research and a proprietary Sustainable Development Goals (SDGs) alignment tool to target companies engaged in the pursuit of SDGs including ‘Zero Hunger’, ‘Good Health and Wellbeing’, ‘Clean Water and Sanitisation’ and ‘Responsible Consumption and Production’. In addition, approximately 80% of the fund’s portfolio holdings will be invested in companies seeking to target biodiversity impact through their solutions or business policies. With the world’s population projected to reach 10 billion by 2050, approximately 56% more food will be required to sustain that growth, Principal AM noted. Increasing demand for sustainable food and biodiversity and growth in agritech also mean the fund will seek to accelerate investment potential in those sectors while lowering environmental impact. “We believe sustainable food production is the most credible path to improving biodiversity,” said Martin Slipsager Frandsen, Global Equities Portfolio Manager at Principal AM. “With agriculture remaining the most biodiversity-exposed sector, it holds the greatest potential for impact and we believe current demand for biodiversity will lead to great investment opportunities.”
The Cambridge Institute for Sustainability Leadership-convened Corporate Leaders Group (CLG) has published key recommendations from leading businesses on how to build a sustainable, competitive and resilient UK economy. The policy briefing, ‘Unleashing the Green Economy’, is intended as a guide for the incoming government to unlock net zero and economic growth, providing concrete case studies showcasing successful business leadership across various sectors – with the overall goal to attract more investment into the country. “As other nations accelerate their efforts, investment opportunities are at risk of shifting away from the UK,” the CLG said. “In the US, the Inflation Reduction Act attracted US$110 billion in private investment within its first year. Similarly, the EU’s Green Industrial Plan has leveraged an additional US$45 billion from the European Investment Bank, and is expected to mobilise over €150 billion (US$162 billion) in new green investments.” Describing net zero as a “unique economic and political opportunity”, the group said the right policies and bold political leadership would allow UK businesses to go further and faster in their climate action. In parallel, a joint letter to freshly elected Prime Minister Keir Starmer drafted by the UN-supported Principles for Responsible Investment, the Institutional Investors Group on Climate Change and the UK Sustainable Investment and Finance Association, outlined the urgent need for a supportive policy environment to provide businesses and investors with the certainty needed to make long-term investments. Aldersgate Group, E3G, the Impact Investing Institute, ShareAction and the World Wide Fund for Nature all supported the letter. “The majority of the estimated £50-60 billion a year required if the UK is to meet its climate commitments will need to come from private capital, including from many of our members,” the letter read. “By identifying priority areas for decarbonisation – such as achieving clean power by 2030 or tackling the highest-emitting sectors and deploying targeted policies and public finance tools to support these – you can crowd in private finance at pace and scale.” Other supporters of the letter included Cardano, CCLA, Sequoia Investment Management, Scottish Widows and IFM Investors.
Bonds issued by emissions-intensive sectors outnumbered green bonds by 2.5 to 1 last year, according to new figures from the London Stock Exchange Group. Green bond issuances in 2023 hit US$540 billion, up 7% year-on-year. But those issued by carbon-intensive sectors stood at US$1.4 trillion in issuance, accounting for about a third of all non-financial bond issuances. Still, green bonds were on an upward trend, making up 7% of total new issuances in 2023, compared to 2% of the entire value of outstanding bonds. For LSEG, the gap between green bond and carbon-intensive bond issuance “highlights the potential opportunity for rapid growth in the green and transition bond markets if the low-carbon transition accelerates”. Overall, LSEG found the green economy was the second top-performing sector after tech. It calculated that the global green economy had a market capitalisation of US$7.2 trillion and recorded a 13.8% compound annual growth rate over the past 10 years. Companies with green revenues accounted for about 8.6% of global listed equity markets as of April 2024, the report found. Energy efficiency investments were best-performing, but renewable energy underperformed the benchmark. Downsizing at some large US green companies earlier this year has also meant the green economy’s share fell slightly from 8.9% at the end of 2023 to 8.6% in Q1 2024, the report said.
Research provider Verdantix has forecast that the EU’s recent establishment of supply chain due diligence rules and social-related disclosures to improve transparency would unlock a US$7 billion market in supply chain sustainability software by 2029. The report highlighted recent rules such as the EU Forced Labour Ban, which prohibits goods made with forced labour, as an impetus for the projected 34% compound annual growth rate in related software spending between now and 2029. Manufacturing and retail are anticipated to be the biggest-spending sectors. “Europe leads the world on sustainability regulations, and this is reflected in its projected spending on supply chain sustainability software,” said Jessie Wilson, ESG and Sustainability Analyst at Verdantix. “However, the extraterritorial reach of regulations such as the Corporate Sustainability Reporting Directive means we expect spending in other regions such as North America to catch up.” Outside of the EU, risk management use cases are expected to accelerate global spending on supply chain sustainability software to US$2.8 billion by 2029, driven by supply chain disruption from geopolitical conflicts, such as the recent Red Sea attacks. “We expect future supply chains to be smart and resilient, leveraging AI to enhance data quality and predictive risk management,” said Wilson. “These advancements will provide deeper insights, helping companies identify and mitigate risks such as forced labour and sourcing from conflict-affected areas or sanctioned regions. Integrating these technologies will transform supply chains, making them efficient, ethical, and sustainable.”
Singapore sovereign wealth fund Temasek has increased its internal carbon price (ICP) to US$65 per tonne, in an effort to prepare its portfolio for a decarbonising world. The latest figure is up from US$42 in 2021, and US$50 per tonne in 2023, the S$389 billion (US$288 billion) fund said in its first sustainability report. The group first applied an ICP in 2021 and aims to raise it to US$100 per tonne by 2030. ICPs have become an increasingly common tool used by companies and investors to price carbon emissions even where no official carbon price is in place. Temasek said it used the ICP both to inform transition risk analysis and to help “build a forward-looking portfolio in alignment with the global ambitions for net zero”. The group revealed it now has S$44 billion in what it calls “sustainable living” investments, which cover broad-based sustainability and environmental themes. Of those, S$6 billion are in “climate transition investments”. In addition, Temasek has lowered its portfolio emissions by 6 million tonnes – a 22% reduction from the previous year. Its emissions stood at 21 million tonnes on 31 March 2024. “Sustainability and ESG are central to Temasek’s investment philosophy,” said Dilhan Pillay Sandrasegara, CEO of Temasek. “In an era of unprecedented global challenges, and against the backdrop of a volatile, uncertain, complex, and ambiguous – or VUCA – world, sustainability, alongside good governance, have emerged as drivers of long-term portfolio resilience, value creation, and growth.” VUCA is an acronym invented by American scholars Warren Bennis and Burt Nanus in the 1980s.
Venture capital (VC) investment in clean energy startups declined globally last year for the first time since alternative energy technologies began to attract “serious” funding in 2015, Oliver Wyman has reported. In this year’s ‘Clean Energy Startup Radar’, the global consulting firm found that investment in clean energy startups totalled US$11.6 billion in 2023, down from US$12.3 billion in 2022 — a “high point” for investment in the sector – representing a 6% dip. This drop, however, was minimal compared with the 38% “plunge” in total global VC investment across all sectors as high interest rates, inflation, and slowing economic growth took their toll on market liquidity. “By comparison, AI attracted a stunning US$50 billion last year, soaking up much of the limited capital available,” Oliver Wyman said. “The drop in clean energy investments mirrors a similar decline in the corporate sense of urgency around climate, despite new regulations and mounting weather events related to a changing climate.” Alongside challenging economic conditions, the lure of AI startups dampened the fervour for sustainable energy among VC investors – especially in North America and Europe, where funding dropped 21% and 29%, respectively. In contrast, VC investment across the Asia-Pacific – in China, particularly – doubled last year compared to 2022 levels. Oliver Wyman’s startup radar is based on analysis of early-stage investment data from tech platform Crunchbase, and tracks VC investment in the sector to identify trends, promising innovations, and new business models, as well as opportunities and risks.
Dutch asset manager Robeco has launched two equity strategies and repositioned two fixed-income ones to bolster its position on transition investing. The moves aim to enable investors to tap into the growth potential of the green transition from both a financial and sustainable perspective. The new Emerging Markets Climate Transition Equities strategy will specifically focus on the low-carbon economy transition and aligning with the goals of the Paris Agreement, while the broader Transition Asian Equities strategy will consider environmental and social objectives while having a transition focus. The two repositioned fixed-income strategies include the Sustainable Emerging Credits strategy, which has become the Transition Emerging Credits strategy, and the Sustainable Asian Bonds – which is now the Transition Asian Bonds strategy. Robeco flagged that an estimated US$125 trillion are needed to transfer global emerging economies to net zero by 2050, with the biggest changes needed in Asia and emerging markets – justifying its focus. The asset manager also noted that transition leaders have historically outperformed laggards – both in developed and emerging markets. “We acknowledge the significance and opportunities of transition finance,” said Lucian Peppelenbos, Climate and Biodiversity Strategist at Robeco. “Our expertise in equities and credits, our deep understanding of emerging markets, as well as our sustainability background, are key ingredients to drive successful transition investments.”
ESG data provider GRESB’s asset impact team has designed a transition-focused tool to help asset owners and managers better manage transition-related risks in their public equity and fixed income portfolios. Transition Analytics covers 11 of the world’s most emissions-intensive and climate-critical sectors, including power, and links more than 148,000 physical assets to 3,000 listed companies that own stakes in them – alongside 32,000 listed and private subsidiaries. “Rather than just having access to granular data, investors increasingly want asset-based insights quickly to inform the transition of their portfolios,” Vincent Jerosch-Herold, Chief Product Officer at GRESB’s Asset Impact, told ESG Investor. “By starting at the asset-level and producing indicators at the company-level, we’re able to address a lot of the flaws that exist within corporate reporting, [including] the absence of forward-looking data.” The tool’s absolute and physical emissions data goes as far as 2030, giving investors the ability to stress-test their investment strategies and form an idea of future impacts in their portfolios. They are also be able to select bottom-up sectoral targets in line with guidelines issued by the Net Zero Asset Owner Alliance (NZAOA) and Net Zero Asset Manager initiative (NZAM). “We wanted to strike a balance between providing investors with top-level analysis and more granularity, so users can quickly identify high-level transition signals – such as whether a company is building out new coal projects or investing in renewables – before we break it down with more granularity,” said Jerosch-Herold. “We wanted to give investors an entry point into our product universe that’s simpler but isn’t the ending. Investors have the option to go deeper, to access data on individual assets.”
