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Coining it with conscience: Environmental, social, governance strategies

Covid-19 pandemic has highlighted the need for resilience across societies

Report shows that more than nine out of 10 asset managers (94 per cent) now have responsible investment policies in place incorporating environmental, social and governance  frameworks.

Report shows that more than nine out of 10 asset managers (94 per cent) now have responsible investment policies in place incorporating environmental, social and governance frameworks.


You don’t have to be morally skinted to be financially minted. Thanks to the inexorable rise of environmental, social and governance (ESG) considerations at institutional level, it is increasingly possible for retail investors to “coin it with conscience”.

According to S&P Global Ratings, a US credit ratings agency, issuance of sustainable debt, including green, social, sustainability and sustainability-linked bonds, will top $700 billion this year. This will take cumulative issuance past the $2 trillion milestone, from $1.3 trillion at the end of last year.

In an end of January statement the agency says social bonds have emerged as the fastest growing segment of the market, having grown 8x in 2020, “catapulted by the Covid-19 pandemic and growing concern about social inequities”.

The pandemic has highlighted the need for resilience across societies so that they could better withstand high impact shocks, including those related to health, safety, social fragmentation and climate change, it says.

“As this theme becomes more prominent, the connection between social inclusion and the environment will strengthen, and the effect will spill into the capital markets, leading to a rise in instruments targeting broader sustainability objectives,” it predicts.

News that BlackRock, the world’s biggest asset manager, with some $8.7 trillion in assets under management, has committed to pushing the companies it invests in to achieve net zero emissions by 2050. The suggestion is that it will divest itself of companies that don’t do this, a clear indicator of the tectonic shift that has taken place in capital markets.

Social bonds

But the growth of profit with purpose has expanded beyond the environment.

“After a breakthrough year in social issuance in response to the Covid-19 pandemic, we expect social bonds will maintain a prominent place in the sustainable bond market. The pandemic has heightened issuers’ and investors’ interests in the vast social inequalities and justice issues – including rising unemployment, income inequality, and strains on housing, health care, and education systems – that exist around the world,” says S&P Global Ratings.

The European Union has already seen massive social bond issuance under its Support to mitigate Unemployment Risks in an Emergency (SURE) programme.

It raised €39.5 billion from SURE social bonds in fourth-quarter 2020 alone.

“In the Asia-Pacific region, social bonds outpaced issuance of green bonds for the first time as banks and sovereigns turned their attention to financing health care, employment programs, and other social development projects in many of the region’s vulnerable communities,” says S&P.

Regulation is helping in the EU too, including the EU’s IORP II, which will ensure pension schemes can include ESG factors.

Ireland’s Annual Responsible Investment State of Play Report, published in November, shows more than nine out of 10 asset managers (94 per cent) now have responsible investment policies in place incorporating environmental, social and governance frameworks. That’s up from 81 per cent in 2018.

The report, commissioned by Sustainable & Responsible Investment Forum Ireland, shows that responsible investing is now a prime driver in investment management here.

“We’ve seen a dramatic surge in this area over last number of years, as the UK, EU and even the US have all made significant commitments to climate change, with events such as the Paris Accords starting that conversation,” says Richard Kelly, head of client business in Ireland at Legal & General Investment Management.

Even more influential, however, has been the actions of pension scheme members, querying the ESG strategies of their trustee boards, a by-product of the shift from defined benefit to defined contribution pension schemes.

“In the Irish market, for many years, most savers were part of a defined benefit scheme, which meant they left it up to the company to manage their pension and make those investment decisions,” Kelly explains.

The swing towards defined contribution schemes has led individuals to consider the impact of their own pension funding, and investments generally.

“Younger members in particular, who have 30 or 40 years of savings ahead of them, want to know what impact those savings will have, not just about climate, but in relation to social and governance issues as well,” says Kelly.

He too believes the pandemic has brought social and governance factors to the fore. Some companies that responded well to their employees’ social needs, such as getting them set up to work from home quickly, saw that strength reflected in their share price.

Dominant narrative

That the E of ESG, environment, has to date been the dominant narrative is because it reflects our lived experience, whether watching wildfires in Australia or wading through floods closer to home, he says.

Individual investors can have an impact on ESG by finding out about a fund manager’s priorities before they invest, says UCD academic Andreas Hoepner, professor of Operational Risk, Banking and Finance at University College Dublin.

If you’ve an investment to make, “do a smell test”, he suggests. “Look at the top holdings of the fund and see if you agree with them. Their views about what is ethical may be different from yours.”

Ask how asset managers voted at AGMs in relation to things such as climate change or human rights. “It might take some Googling but if you know the right questions to ask, you can find out,” he says.

The proliferation of dedicated green, sustainability and social bonds shows just how mainstream ESG investing has become, says Mark Jordan, head of technology at Skillnet Ireland, the national business support agency responsible for workforce development.

“It is where the money is being spent that is having an impact, because people can see it being spent on everything from affordable medicine, to education, to sustainable housing, and measures to reduce inequality and increase access to finance,” says Jordan.

The advent of digital investment platforms means millennials in particular expect this kind of fund “look through” as a matter of course. “It has become much more transparent so people know what will happen if they invest,” he says.

The move towards responsible investing is only going one way.

“It’s massive,” says Jordan. “When we look at global flows of money, data tells us that the inflows are all into things like green technology, sustainable and social bonds. The outflows are from traditional ones.”