Investor flows to ESG funds intensified towards the end of the 2020 calendar with record monthly inflows in October, November and December of $ 35 billion, $ 49 billion and $ 50 billion.
In debt markets, $ 497 billion in ESG-labeled debt was issued globally in 2020, up 80% from 2019. Global sustainable investment assets now total $ 30 trillion.
Olszowka, who heads sustainable finance at London-based Nomura International, says the market is driven by asset managers, debt issuers and banks.
“Asset managers looking for new pension fund asset allocations now find that the determining criteria are often linked to ESG,” he says.
“The pandemic has accelerated the realization that the fight against climate change is essential and that everything is interconnected.
“Every month, ESG strategies are increasingly geared towards ESG strategies, with both new ESG funds being launched continuously and the assets under management of existing funds soaring.
“The direction of travel is clear, this is just one way, the focus on sustainability keeps growing and this area is growing bigger and bigger.
“I think this is one of the main mega-trends outside of digitization, which will affect the economy over the next decade.”
He says sustainability bonds are the next generation of ESG products. Bond issuers commit to realizing concrete carbon reduction improvements within a predefined time frame. About US $ 10 billion has already been issued.
Usually, bonds include a step-up mechanism, in which the coupon increases in the event that the issuer does not respect its previously agreed ESG commitment. The ECB had never before accepted step-up bonds as collateral.
“The beauty of this product is that it opens the door for a large number of borrowers who want to participate in ESG-focused issues,” says Olszowka.
Until sustainability-related bonds arrived, companies in carbon-intensive sectors such as aviation, steel, cement, mining and shipping could not issue green bonds with a any level of credibility.
“There is an argument that with a green bond you could be in a situation where you are for example an emitter of a highly polluting sector with, for example, a balance sheet of 100 billion dollars and you find 1 billion dollars of qualifying green assets that you want to finance, say wind farms or solar power plants, ”he says.
“Nothing prevents you from issuing a green bond. This is not greenwashing per se, as the assets you finance through the green bond are 100% compliant with the relevant criteria.
“But there may be cases where such a company continues its ‘business as usual’, with no intention of shifting to a low carbon business model.
“However, many ESG investors are looking at the borrower’s broader ESG credentials, whether the company is on a path aligned with the Paris Agreement or is genuinely moving towards it and not just the ‘specific use of the proceeds of a particular obligation.
“OK, in our example, you just issued $ 1 billion and bought wind or solar assets, but you’re still on the path to complete non-alignment with Paris – you’re very polluting.”
Compare that with a company that issues a sustainability bond and fails to meet its key performance indicators and sustainability targets.
It would be financially sanctioned by an increase in the coupon and risk being banned or shunned by blacks by ESG funds and buyers of green bonds. These are important incentives for an entire business to transform rather than making a token investment in renewable energy.
