In addition to the growing number of ESG (environmental, social, governance) funds available to investors, green bonds and social bonds have hit the market in a big way in recent years.
Companies are also starting to access sustainability-linked debt needed to grow their respective businesses, all of which is shifting the investment landscape for those interested in incorporating a sustainable or ESG approach when choosing their investments.
“We were involved in the very first sustainability-linked loan,” says Michael Jantzi, CEO of Sustainalytics, an ESG ratings company recently acquired by Morningstar Inc. “Companies with strong sustainability performance are able to access debt from financial institutions at more favourable terms. Sustainalytics had been very involved in the sustainable-linked debt market.”
Fixed income investors with an interest in sustainable investing also have a growing number of “green bonds” to choose from, after companies including JP Morgan Chase & Co., The Coca-Cola Company, Visa Inc., Alphabet Inc. (Google) and Starbucks Corp. all issued green bonds into the market. (All of those issuances, even those issued amid this year’s volatility, have been well-subscribed, Jantzi says.)
A small but growing part of the market
“They’re the same as vanilla bonds, as I call them,” he adds, “the only difference is, when you look at the use of proceeds, in a green bond, proceeds would be put directly to initiatives and business strategies that are focused on positive environmental (or social) impact. This is a small part of the market, but it has grown very quickly.”
He says companies are only just beginning to understand that they have the ability to finance environmental or social initiatives and related changes to their business models. “There is an investor base that is capable of allocating assets to those use of proceeds. More importantly, they are willing to do so.”
When investing in ESG-branded funds or bonds, Daniel Rohr, Morningstar’s head of global equity research says investors and advisors will likely notice that ESG risks tend to be very long-dated. “They’re perhaps not terribly likely to materialize over the next few quarters. But when your relevant time horizon stretches out decades or more, these are profoundly important investment considerations.” All other factors equal, he says the firm believes that companies with less ESG risk exposure are more likely to possess a durable competitive advantage.
Shifting values
”ESG is a tool that helps us estimate a firm’s intrinsic worth. It is one piece of the puzzle that the investor needs to consider.” - Daniel Rohr
“Does that necessarily make them better investments? Of course not,” he adds.
“There is no clear-cut evidence that blindly buying stocks with a strong ESG profile is a recipe for excess returns. Like any type of fundamental analysis, ESG is a tool that helps us estimate a firm’s intrinsic worth. It is one piece of the puzzle that the investor needs to consider. As society’s values shift, our bet is that it will prove to be an increasingly important piece.”
