A recent Moody’s report forecasts that green, social, sustainability and sustainability-linked (GSSS) bond issuance will be flat in 2022. Amid greenwashing scandals and market headwinds, has ESG investing lost its steam?
Sustainable bond issuance will be flat in 2022 amid market headwinds, declares the title of a Moody’s report released in May. But is anyone surprised? If 2020 and 2021 were banner years for sustainable investing, 2022 is surely the year of backlash.
That same month, the US Securities and Exchange Commission (SEC) fined a BNY Mellon unit US$1.5 million ($2 million) for misstatements and omissions about its environmental, social and governance (ESG) considerations.
Sanjay Wadhwa, deputy director of the SEC’s enforcement division, said BNY Mellon Investment Adviser “did not always” perform the ESG quality review that it had disclosed for certain mutual funds it advised.
A Bloomberg headline the following month spells it out in even simpler terms — “The SEC war on greenwashing has begun”. The next target in the SEC’s sights is reportedly Goldman Sachs, whose mutual funds allegedly do not meet the ESG metrics promised in its marketing materials.
To be sure, the sustainable investing field — be it for altruistic or practical reasons — faces other pressures too. The spectre of inflation and Russia’s invasion of Ukraine have easily eclipsed rallying calls for “doing well and doing good” — the motto behind sustainable finance.
Moody’s forecast is built upon what is now a full-year trend: Green, social, sustainability and sustainability-linked (GSSS) bonds fell for the fourth straight quarter in 1Q2022, down from an all-time peak in 1Q2021.
The fall in volume corresponds with declining value: Global issuance of GSSS bonds totalled US$203 billion in 1Q2022, down 11% from 4Q2021 and down 28% from 1Q2021.
See also: Is your financing really green?
Russia’s war with Ukraine has dragged on longer than expected. With no end in sight, the conflict has impaired global economic growth prospects, stoked existing inflationary pressures and heightened the prospects for accelerated monetary policy tightening, write Moody’s Matthew Kuchtyak, vice-president of sustainable finance for the Americas, and Erika Bruce, associate analyst.
“While our baseline expectation is that sustainable bond issuance growth will resume when market volatility abates, broader market conditions will provide greater-than-anticipated headwinds for sustainable bond issuance this year,” say Kuchtyak and Bruce.
They anticipate GSSS bond volumes will be roughly flat compared with last year’s total, with around US$1 trillion of issuance for the whole of 2022. “At an instrument level, we now forecast US$550 billion of green bonds, US$125 billion of social bonds, US$175 billion of sustainability bonds and US$150 billion of sustainability-linked bonds.”
Indeed, bond issuance in the sustainable finance space will continue to pale in comparison to the exuberance seen this time last year, say OCBC Credit Research analysts Andrew Wong, Ezien Hoo, Wong Hong Wei and Toh Su-N in a July 5 note.
For 1H2022, GSSS bond sales from governments and corporates total US$464.9 billion globally, down 19% y-o-y, notes the OCBC analysts, citing numbers from Bloomberg. Total global GSSS bonds issuance decreased some 22.9% m-o-m to US$65.0 billion in June.
According to OCBC, recessionary concerns and anticipation of higher funding costs will likely delay overall corporate bond issuances and spill over to dampen GSSS bond issuances as well.
Compared to the same period last year, monthly figures are expected to deteriorate further, say OCBC’s analysts, given the “surge” in GSSS bond issuance volumes recorded in 2H2021, while 2H2022 continues to remain challenging for issuers as cost of funding increases.
A healthy pause
To some ESG professionals, these are but teething pains, and not a reversal of what is supposed to be a growing trend. Applying some brakes on the sustainability train could be a good thing in the long run, they add.
It is healthy for the market to take a pause, says Ben Meng, executive vice-president and chairman of Asia Pacific at Franklin Templeton, especially in the face of heightened regulatory scrutiny. “The industry needs to reflect on what has been done and [identify] areas of improvement.”
Meng is not too concerned about the crackdowns; he believes ESG adoption is inevitable. “The directional trend of ESG investing [and] green bond issuance is very clear, but it’s not going to be a straight line.”
Green bond issuance, like the momentum for ESG investing, will waver from time to time, he adds. “There are times we go too fast; we learn from it and we pare back a little bit. There are times that we pause and reflect. It is almost like taking one step backward, then one big leap forward.”
Allianz Global Investors’ sustainability specialist Jonathan Ho agrees. “As the entire society becomes more aware of sustainability, the scrutiny on any sustainability-related claims will become more intense.”
This has manifested in some incidents of alleged greenwashing, he adds. “I believe the increasing focus on the credibility and quality of sustainability is a natural development, and in the grand scheme of things, it is a shift to a more balanced focus between quantity of ESG investing and quality of ESG investing.”
In a way, greenwashing was “unavoidable”, and so is the ongoing day of reckoning, says Meng. “There were no such regulations [in the past]; there were no standards.” The troubles seen today create great opportunities for the “authentic players”, he adds.
Meng quotes the oft-repeated proverb by Warren Buffett: “A rising tide lifts all boats, but only when the tide goes out do you discover who has been swimming naked.”
Greenwashing is nothing more than this: What you’re saying does not match what you’re doing.- Flora Wang, Fidelity International
Those being exposed today may blame the nascent sector for its vague and underdeveloped standards, but Flora Wang, director of sustainable investing at Fidelity International, minces no words about the malpractice. “Greenwashing is nothing more than this: What you’re saying does not match what you’re doing.’”
Just like the green transition’s mantra of “many shades of green”; greenwashing, too, comes in several hues. Wang sees two types of greenwashing. “One is probably a lower level of greenwashing, which is nothing more than outright lying.”
However, the other is “a lot more difficult to detect”, says Wang, especially by retail investors.
“When the fund is not being very clear about what it means to be an ESG fund, they could make a very generic statement about what this particular ESG strategy is about, to the extent that it’s very difficult to really measure it,” adds Wang. “Intentional wording to make things especially vague is what the industry is perhaps struggling with.”
The potential for ambiguity is lessening by the day. The International Sustainability Standards Board (ISSB), which was set up to develop a global baseline standard for sustainability reporting, has released two exposure drafts for public comment — one on general sustainability disclosures and the other on climate-related disclosures.
Together with recommendations put forth by the Task Force on Climate-Related Disclosures (TCFD), the frameworks should pave the way for more consistent reporting soon — to the relief of boards, bourses and regulators.
The TCFD’s recommendations address how climate change might impact an organisation’s ability to create value. The 11 disclosures are divided into four pillars: governance; strategy; risk management; and metrics and targets.
The Singapore Exchange (SGX), for one, recognises the recommendations of the TCFD. The bourse has mandated climate reporting for all listed companies in the financial years starting Jan 1 — built upon the TCFD’s pointers.
Cleaning up the ‘alphabet soup’
The “alphabet soup”, as ESG experts term it, grows thicker with each new acronym. But they believe the simmering will soon give way to a clearer broth — that is, a globally-recognised standard for sustainability reporting.
Sometimes, when things converge, it becomes more of a box-ticking exercise.- Mark Errington, ERM Asia Pacific
Thus, some experts embrace the ongoing chaos. Mark Errington, chief executive officer of ERM Asia Pacific, welcomes the many reporting standards in development today. “I’m a big believer that a bit of fragmentation actually creates opportunities for people to be thought leaders.
“Sometimes, when things converge, it becomes more of a box-ticking exercise,” says the Asia Pacific head of the world’s largest pure-play sustainability consultancy.
That said, Errington notes that there is “more convergence now than ever”. With the TCFD as a “foundational standard”, sustainability reports should become more consistent “across geographies and corporations”.
Franklin Templeton’s Meng agrees that the TCFD could “anchor” the world’s search for a global standard. “It doesn’t have to be perfect — just something that we can improve upon.” Meng notes that the largest economies outside the US — China and Europe, for example — are developing their own standard taxonomies, though they are similar to the TCFD.
Exploring different standards “is okay”, he adds. “I’m not that fixated on having one standard globally. If it takes different standards, even by industry, I’m supportive. Each region has unique challenges, constraints and opportunities as well.”
Fidelity’s Wang takes a more conservative approach to disclosures. “I think it needs to be standard; we shouldn’t have regional customised disclosures, because disclosures are facts. We want a mining company in China to disclose the same set of ESG metrics and facts about their business as a mining company in Australia.”
What needs to be catered to different markets, however, is the interpretation of that data, she adds. “It needs to be analysed in the context of that business, in that particular market, in that development stage.”
More importantly, the financial industry must learn how to apply sustainability data, says Wang. “For a very long time, asset managers have said: ‘We can’t do this properly because companies are not giving us the information we need.’”
She adds: “But the real question is: once you’ve got the information, how are you using them?”
Asia’s big advantage
On developing ESG regulations, experts The Edge Singapore spoke to specifically mentioned Asia’s opportunity to “leapfrog” the West by building upon their mistakes and achievements.
AllianzGI’s Ho acknowledges that Europe is ahead of Asia on the sustainability front by virtue of its first-mover advantage, but our region is “catching up very quickly”. “A unique advantage that Asia enjoys is that it can ‘leapfrog’ in terms of its development.”
Ho adds: “Many developed markets, including Europe, have historically taken a more traditional route for development. Take energy use, for example: their economies transitioned from coal reliance to oil, [then] to gas and now, they’re starting to rely more on nuclear and renewables. Asia could ‘leapfrog’ in the sense that markets have the opportunity to transition from coal directly to renewables. This makes Asia all the more exciting.”
Fidelity’s Wang agrees. “I think the biggest advantage we have is actually to learn from the mistakes of the other markets. Exchanges here could just take the disclosure frameworks that have been developed and apply them to companies here as they start to do ESG reporting. We’re essentially ‘leapfrogging’ the long history that companies in Europe or the US have gone through.”
This is an issue faced globally. It is everyone’s problem; not a US problem, not China’s problem.- Ben Meng, Franklin Templeton
Amid the divergent landscape, the key to success in sustainable finance is to bring “all forms of capital to the table”, says Meng. “Bring everyone to the table: all parts of society, public and private capital. This is an issue faced globally. It is everyone’s problem; not a US problem, not China’s problem.”
Carbon emissions do not respect national borders, says Meng. “Get everyone engaged and doing something. Having one [reporting] standard is great, but it is just the beginning. There is always another step forward.”
Full steam ahead
The green finance sector may be taking a breather, but there is still much to be done. The latest reports from the Intergovernmental Panel on Climate Change (IPCC) on climate adaptation and mitigation clearly indicate that only “immediate, ambitious action” will reduce the greatest risks of devastating climate change.
The IPCC report notes that between US$7.9 trillion and US$12.7 trillion of assets could be exposed to the risk of severe coastal flooding by the end of the century, assuming a 1.4°C increase in average global temperature by 2046 to 2065.
If the average global temperature increases 2.0°C over the same period, however, the value of assets exposed to severe flood risk could rise as high as US$14.2 trillion.
To date, however, GSSS bond proceeds allocated to adaptation and resilience projects have been limited, write Moody’s analysts.
In 1Q2022, only 3% of green and sustainability bond proceeds were allocated to climate change adaptation projects, with most proceeds going to climate mitigation categories, such as renewable energy, green buildings, clean transportation and energy efficiency.
Pointing to the recent heat waves around the globe, Kuchtyak and Bruce of Moody’s add: “We anticipate more financing will be allocated to adaptation projects going forward as the physical impacts of climate change become more frequent and severe.”
AllianzGI’s Ho believes sustainability momentum will only grow due to shifting client preferences and the many developing policies and regulations. “[There is] an acknowledgement that fiduciary duty in the 21st century requires a more holistic consideration of risks and opportunities, including [those] related to sustainability.”
The commitments being made by large corporations around the world towards net zero are “just staggering”, says James Gifford, head of sustainable and impact advisory at Credit Suisse.
“I guess this comes back to your original point on whether ESG still has the momentum that it had. Sometimes, in some parts of the cycle, things grow faster. Other times, they grow slower,” says Gifford. “But I have a very long-term view.”
Environmental and social issues are not going away. In fact, they’re getting more intense as people demand cleaner air, as consumers get more educated around the sustainability of their products.- James Gifford, Credit Suisse
Gifford was the founding executive director of the UN Principles for Responsible Investment — a pioneering body of the ESG investing sector back in 2003.
He adds: “I’ve been in this space for 20 years. I’ve seen the 2008 global financial crisis and, of course, things were tough after 2008. But it just kept going. The reason it kept going is because environmental and social issues are not going away. In fact, they’re getting more intense as people demand cleaner air, as consumers get more educated around the sustainability of their products.”
Singapore leads the region
Closer to home, ERM’s Errington sees Asia leading ESG investments with “faster growth than the Americas”. “I get your point on the Moody’s report, but I think that’s just a moment in time; we’re playing the long game here.”
According to a HSBC report from June, the six largest Asean economies issued a record amount of green, social, and sustainability (GSS) debt in 2021. Singapore, Malaysia, Thailand, Vietnam, Indonesia and the Philippines together issued US$24 billion in GSS debt last year, up 76.5% y-o-y.
Sustainability-linked debt, meanwhile, totalled US$27.5 billion in 2021, up 220% y-o-y.
Singapore remained the regional leader, with GSS debt issuance of US$13.6 billion in 2021, more than double the US$4.9 billion issued in 2020. “The growth is mainly driven by the green theme and reflects strong support for green finance from the Singaporean government,” says HSBC.
Within Asean, Singapore was the largest source of green debt with a volume of US$12 billion. Together with Indonesia, Singapore has the most diverse mixture of deal sizes, ranging from below US$100 million to above US$1 billion.
Singapore was also the largest source of Asean sustainability-linked loans and bonds at the end of 2021, with 94 out of a total of 129 deals, and a cumulative volume of US$33.6 billion. This accounted for 84.5% of the regional market.
In June, the government published the Singapore Green Bond Framework, first announced at Budget 2022 in February. This sets the stage for Singapore’s first sovereign green bond to be issued in the coming months.
Looking ahead, Wang is “very confident” in the long-term pickup of ESG investing, especially as the sector confronts greenwashing. “Ultimately, ESG investing is just a form of investing, right? No one will disagree with me when I say the key to a good investment decision is good investment research. The same goes for ESG.”
She adds: “I’m just constantly amazed by how little is devoted to ESG analysis and research. That, to me, is really the root cause of a lot of the symptoms we’re seeing. I’m hoping this can be somewhat of a wake-up call for the industry in acknowledging the proper way to deliver outcomes.”
Photos: Albert Chua/The Edge Singapore, Allianz Global Investors, ERM