Sustainability infosphere still maturing, investors say

The annual KangaNews survey of Australasian fixed-income investors’ preferences in the sustainable debt market highlights the development that is still needed on data and information. Investors want various types of information but its availability and quality may be a headwind for further evolution.

Laurence Davison Head of Content KANGANEWS

This year’s survey attracted a record level of engagement: more than 60 institutional investors in Australia and New Zealand provided responses, with participation from the majority of local major asset management firms as well as insurance, superannuation and private credit investors.

The survey is open to specialist environmental, social and governance (ESG) investment firms but the bulk of responses come from mainstream investors, as has always been the case over the years KangaNews has sought survey input.

Buy-side views on the type of sustainability reporting they want to see from bond issuers is relatively consistent. The majority of investors are focused in particular on issuers’ annual sustainability reports, though a growing number – this year nearly 60 per cent – also want to see security-level impact reporting (see chart 1).

This data point reflects investor views on the importance of whole-of-issuer ESG credentials relative to security-level outcomes. There is no strong consensus on either side but a slight weighting toward a focus on the issuer. This marginal preference for issuer-level credentials is an outcome that has emerged consistently in investor responses throughout the history of the survey (see chart 2).

On the other hand, the 2023 survey displays a notable reweighting of investor preferences in favour of labelled securities. In 2020, the first year KangaNews conducted this survey, 71 per cent of investors said they believed “issuer level credentials as a whole, with appropriate reporting” to be the best option for ESG in bond issuance compared with just 19 per cent that favoured “use-of-proceeds (UOP) bonds that meet an external standard” (see chart 3).

The equivalent numbers in the 2023 survey have not quite reversed but the trend is clearly in that direction. The latest results show 51 per cent of investors now favour UOP issuance while just 38 per cent opt for the sustainability credentials of issuers on a holistic basis. Sustainability-linked bonds and programme certification have never developed momentum in the survey or market.

There is a fair degree of consistency when it comes to what investors want issuers to report on. Alignment with external targets – whether they be regulatory, international or net zero – are the clear buy-side preference (see chart 4). Issuers setting their own targets carries significantly less appeal and there seems to be a marginal loss of momentum for reporting against social factors and targets.

This may be the product of increasing expectations of rigour and quantifiability in sustainability reporting, given the ability to measure and report social outcomes is still relatively low. Investors consistently say they would like greater engagement on social issues and some have made significant progress on matters like modern slavery. But in general there seems to be a view that what cannot be measured does not get managed.

There has also been a stalling of momentum when it comes to emissions scope reporting. There was a big jump in investors’ expectations of issuer reporting between 2021 and 2022, with roughly 20 per cent more investors considering reporting on each of scope-one, scope-two and scope-three emissions to be “central to ESG analysis” (see chart 5).

There has been no equivalent move in the most recent survey, and if anything investors are reporting themselves as being somewhat less focused on scope-one and scope-three emissions reporting.

The survey does not indicate any obvious consensus on investors’ expected timeline preferences for issuer sustainability strategy. Just more than a quarter of investors responding to the survey want delivery within five years but more than 40 per cent express no specific timeline preference at all “provided targets are rigorous” (see chart 6).

This apparent loosening of time horizons also represents a reversal of the trajectory from the 2021 to 2022 surveys. The proportion of investors wanting sustainability strategy timelines of no more than five years climbed from one-third to 45 per cent between those two surveys but has now fallen back to less than the 2020 level. This may not reflect a loosening of ambition, however – it is equally possible that investors have widened the net and now expect plausible sustainability strategies even from hard-to-abate issuers that cannot deliver in just a few years.

In the 2023 survey, for the first time, KangaNews added questions specifically on the information investors get from mainstream credit rating agencies – including a comparison of the relative importance and value the buy side places on agencies’ mainstream credit analysis and ESG analysis.

It is clear that the former is still the main value provided by rating agencies in investors’ minds. While the average of survey responses rate the importance of rating agency information on credit ratings at a level of at least eight out of 10 across issuer sectors, the equivalent value of rating agencies’ ESG information and risk analysis ranges between 5.9 and 6.5 out of 10 (see chart 7). In general, the data show that investors rely on rating agencies more for information on credit issuers than they do in the high-grade sector.

The reason for the lower value placed on ESG information appears to be that investors do not believe what they are getting from rating agencies in this space is wide or deep enough. Just 2 per cent of survey respondents say rating agency ESG information is of “sufficient range and quality”, while one-quarter say it meets neither standard and a further one-third have no opinion of or are not using this information at all (see chart 8).

In the control group – rating agencies’ mainstream information – nearly half of survey respondents say what they are getting is satisfactory in breadth and depth whereas only 5 per cent say it is neither.

Overall, however, the buy side appears to be at least maintaining its level of comfort when it comes to ESG considerations in debt investment – despite heightened regulatory focus on greenwashing. The significance of reputational risk has actually eased somewhat – though only to 7.7 out of 10 compared with 8.4 out of 10 in last year’s survey, while this remains the most significant risk area of those included in the KangaNews survey. Meanwhile, the focus on regulatory and product risk has held steady year-on-year (see chart 9).