Sustainability scores

In March, for the first time, KangaNews hosted its Sustainable Debt Summit as a full-day event, reflecting the exponential growth in interest in environmental, social and governance (ESG) integration in the fixed-income universe. The sector is now much broader than green-bond issuance, as reflected in discussions at the KangaNews event.

“We are so apt to pick on energy, and yet this sector in my experience actually has some of the best-developed plans to manage transition to a two-degree world. If you look at some of the other sectors – like West Coast tech in the US – there is no plan. They just view themselves as ‘progressive’.”

“Additional transparency is always useful. Having more standardised reporting available gives issuers an easier way to disseminate information without having to create their own systems. It adds the transparency all market participants need.”

“A lot of green-bond issuance has been directed towards the infrastructure space, which is an area in which many investors are looking to expand exposures. The composition of the green-bond index is different from the composite index, with less exposure to Treasury bonds and greater issuance or sector diversity.”

“It’s one thing for us to issue a climate bond, but if we didn’t have an adequate framework in place across the bank, going all the way down to our supply chain, we could run the risk of falling victim to investors’ exclusionary approach to ESG. It’s about the company, not just specific bond issuance.”

“A few years ago the market was like the Wild West, with loose criteria and wildly different use-of-funds approaches in Europe. This has changed, and we now have quite a tight market when it comes to issuance credibility. But we still have real differentiation of types of issuance and, to some extent, investor bases.”

“The focus is, and should be, very much on the ‘middle piece’ – transition – for companies within climate-sensitive sectors, versus focusing exclusively on the ‘end state’ of clean companies.”

“Developing a climate position through deepening our understanding of how we can continue to support our customers with climate transition helped build understanding across the organisation, because of all the internal stakeholders we engaged with during the process.”

“The step-change that has occurred within Australian financial institutions since the Paris accord is sustainability’s move from a fragmented approach to a core part of purpose and strategy. The different aspects – regarding customers, the wider community and the bank’s own book – are like pieces of a jigsaw we are trying to put together as a group strategy.”

“Whether or not the Task Force on Climate-related Financial Disclosures evolves and proves to be long-lasting, it is a fact that more transparent and consistent data is something the investment community has been seeking for a long time – so there will be some equivalent even if it is not the TCFD.”

“What’s different about the TCFD is that it requires integrated thinking and strategy – it’s about bringing together analyses that 10 years ago would have taken place in different parts of an organisation. This often results in a greater ability to leverage opportunities that may arise.”

“Coming up with a best estimate of what a 2 degree carbon budget might look like was incredibly complicated. Investors tell us what they most want is transparency about the assumptions used to develop a particular conclusion, and qualitative guidance about the consequences of changing those assumptions.”

“There are wider pressures coming into the market that will in time drive investors away from companies that aren’t prepared to offer transparency. This is how we will get to the pricing advantage. I firmly believe that, in the long term, the ‘bad’ assets simply won’t get a price.”

“As allocators of capital we have a very special responsibility and duty to direct capital to productive purposes. We learned during and after the financial crisis that this had not been happening, and the financial casino didn’t serve anyone’s interests.”

“Given the design of many Australian-issued green bonds, as with cross-collateralisation of green and nongreen assets, managers need to invest in understanding the sustainability credentials of the issuer – whether or not the bond has a green label.”

“We need to be driving financial and nonfinancial performance. We are building business cases for the sustainability initiatives we are delivering, in order to demonstrate the business value of these initiatives.”

“The shift towards battery-powered automobiles promises wide-ranging implications for numerous industries – similar to the impact the internal-combustion engine had 100 years ago.”

“Our climate-awareness bonds are quite focused in scope, addressing climate-change mitigation through renewable-energy and energy-efficiency projects. Historically, this has been linked to the mandate of the EU’s climate and energy package.”

“Our first green bond issue allowed us to make deeper connections with our clients and understand the types of investments they are making in this space. The challenge to issuing again is finding the appropriate pool of assets that investors want to see.”

“We are getting to the point where it is no longer a moral decision on behalf of fund managers to say they don’t want to own companies that are susceptible to, say, animal cruelty. It is about recognising that the externalities of animal cruelty will ultimately be factored back into the earnings of those companies.”

“Importantly, our investors do not want to trade off financial returns. We fundamentally believe that assets and businesses that embed impact in their core DNA will outperform over time.”

“There is a very big question around whether we fully understand the interests, needs and expectations of end consumers. Our research tells us that purpose now sits alongside profit, with impact and outcomes becoming increasingly important.”

“For a long time, there was a paternalistic attitude in the financial industry and superannuation, where decisions were being made for consumers. This framework has been deconstructed in a number of areas, and superannuation and the finance sector is the next wave.”

“The mind of a bond investor is beginning to tilt towards that of an equity investor, in that they are beginning to think about where a company may be in 15 years – even if they only hold a five-year bond.”

“There is now a significant number of different labels for bonds in this space – green, sustainable, social and climate-awareness being a few. The question has to be raised as to whether greater consistency in labelling would be helpful.”

“We know there is a going to be a big lift in demand for capital to fund infrastructure projects, particularly in the renewable-energy sector. We also know there has been a project-bond market in Australia previously. If the size of projects in the renewable-energy sector continues to scale up, there is no reason why we shouldn’t start to see the emergence of a new asset class – green project bonds.”

“Leadership in the sustainability sector certainly gives you a great reputation and brand that can be leveraged into new economic opportunity. However, we are not chasing revenue in this space. We do it because it is smart business and it is the right thing to do.”

“Resilience practice is founded on understanding the interplay between chronic stresses and acute shocks. In similar ways, the value of ESG investment is perhaps less about considering distinct asset classes or investment criteria and more about having a comprehensive understanding of the opportunities, risks and impacts of an investee entity.”

“When it comes to resilience, city, local and state governments have a challenge to identify the key mitigation and adaptation projects we need to undertake to reduce the vulnerability of the community, and to develop an investable pipeline in our cities.”