Part 5: Unlocking ESG – Navigating the Sustainability Ecosystem Series
Following their discussion, here are our top takeaways:
Investors are increasingly recognising ESG as an investment risk
Blackrock is largest ESG investor in the world and recognises its increasing importance: all teams receive mandatory ESG training, risk reporting is enhanced with regards to ESG and there is a focus on transparency and how they engage with investors around it, noted Scott MacLellan. “Blackrock has a very firm commitment to sustainability - not only philosophically, in terms of the leadership’s outlook, but also recognising the importance from a fundamentals standpoint in terms of generating alpha for the clients,” he stressed.
ESG gaining traction across the globe
Scott expects more demand for ESG assets going forward across all geographies. Europe started the ball rolling in 2016 with PRI, and European investors were leading the way in pushing the development of ESG technology and processes but were seeing it globally now, Blackrock’s MacLellan said, with pension funds and institutional investors more interested in ESG. He also noted that last year there was lots of anecdotal pressure with regards to innovation, with conversations with issuers around social bonds, transition Pathway Initiative (TPI)-linked bonds etc.
Credit rating and ESG scores may be distinct, there are crossovers
Lynn Maxwell sees a lot of focus around ESG at rating agencies and certainly at S&P with the acquisition of the SAM Corporate Sustainability Assessment (CSA) last year, making it possible to benchmark a company's performance on a wide range of industries - with specific economic, environmental and social criteria. “A credit rating is a forward-looking opinion on an issuer’s ability to meet its financial obligations in full and on time. A credit rating is not a sustainability assessment and similarly a sustainability vice versa they are often looking at different profiles of risk,” she pointed out. However, there are times when ESG activity could affect a credit rating. “We’ve seen that in the market pulse we publish, especially with Covid.” Maxwell remarked that a whole world is developing around pure ESG analysis which is separate from credit rating. “Investors like Scott are looking for a clear view on what a company is doing around ESG. It’s also needed to provide a secondary opinion, on the green bond market, social bond market, sustainability bond market, sustainability linked market etc. “We provide opinion on both framework or on the bond issuance itself.” In addition, many investors want to look at the ESG of a company today and how prepared is it for future challenges. S&P launched an ESG evaluation 1-1/2 year ago where companies are scored on current situations and how prepared they are.
2020 trends: governance & social factors
Amongst ESG market trends, for S&P’s Lynn Maxwell highlights social factors. “Covid has really created a different environment with some companies needing to pivot very quickly – how they did it and whether they were able to is key with respect to their credit. Investors want more information about that, and analysts are responding with sector specific analysis and general market trends. That’s a huge focus on the investor side.” She adds there is also a lot of talk about governance as it is related to resilient business models, and the supply chain and climate change risks. Another trend is the large number of social bonds sold this year – by companies that didn’t use to do it historically. “In the sustainability bond market in 2019, social bond accounted for 5%. This year it’s more like 20%. And we don’t expect it to slow down.” MacLellan, for his part. is seeing the evolution of ESG moving into impact with KPIs and targets. “We value a broad range of KPIs. Issuers should be ambitious.”
