ESG investor trends from across the Atlantic

• While sustainable debt is viewed positively, investors are still considerably concerned about the liquidity of the ESG asset class.
  
• Signing up to the UN Principles for Responsible Investment (PRI), which now has more than 7,000 signatories, is increasingly seen as a "must".
• The EU Taxonomy is making waves over the Atlantic: Investors welcome the framework and aim to apply it to their investment processes despite the taxonomy not being a legal requirement in the US.
• While Green, Social and Sustainability (GSS) Bonds are well understood, the characteristics and benefits of Sustainability-Linked Bonds (SLB) are not yet fully clear; issuers, banks and other market stakeholders must provide more education on this ESG product sub-category.

Looking at US investors’ ESG approaches, we gained some valuable insights from our thematic discussions. We also asked a standard set of multiple-choice survey questions (Figure.1) which garnered some interesting results. The key takeaways are presented below:

1. US Investors expect a significant uptick in GSS debt: 83% estimate that more than 10% of the $ market will become sustainability labelled (from 1% currently). At the same time, 92% said they have appetite for subordinated ESG debt. Looking at the growth of their ESG assets, 17% said they expect the share of ESG assets in their portfolio to be over 50% in the next two years.
2. When it comes to preferences of sustainable bond structures, use of proceeds bonds enjoy marginally more support (55% of respondents) versus sustainability-linked bonds (45%). The reason for the hesitance in fully embracing sustainability-linked lies in a lack of clarity about the characteristics of this relatively new sub-category in the capital markets, with associated International Capital Market Association (ICMA) Principles only released in June 2020. With a growing number of firms opting for sustainability-linked bonds in order to avoid restrictions around identifying and maintaining a specific green and/or social pool of assets, it is down to those issuers and their partner banks to continue educating investors about the benefits of sustainability-linked bonds.
3. There’s a clear interest in the evolution of the regulatory landscape, both in the US and in Europe, with 67% of investors participating in the survey expected to embed the EU Taxonomy within their investment process in the next two years. The fact that the EU Taxonomy, which provides detailed eligibility criteria for economic activities that can be called sustainable in Europe, is making waves across the Atlantic despite not being a legal requirement in the US underlines yet again the desire across investor and business communities for a universal green language.
4. Views on the development of the ‘greenium’ are differing: similar numbers of investors expect the price advantage for sustainable debt – green yields are fairly consistently below vanilla ones (although not by much) – to either diminish, stay rangebound or increase.
5. Greenwashing is considered the biggest concern for the market (67%) followed by political change in the US (33%). In this context, investors are significantly upping their game to retrieve reliable ESG data from potential investment targets: a mix of in-house analysis using company disclosures and external ESG rating agencies and data providers, as well as direct issuer engagement supports ESG scoring. Furthermore, investors are keen to learn more about applying climate methodologies to their investment process – as such, issuers should expect investors’ scrutiny to further intensify.
6. Looking at exclusion strategies as part of a sustainable investing strategy, relatively high proportions of funds expect to exclude tobacco (67%) or oil and gas (42%) by 2025, while no such momentum exists behind defence or chemical sectors.

Figure 1: Investor Questionnaire

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. Ednites Credit Union Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does Ednites Credit Union Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other Ednites Credit Union Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. Ednites Credit Union Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does Ednites Credit Union Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on Ednites Credit Union Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. Ednites Credit Union Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

Ednites Credit Union Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Ednites Credit Union Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. BR001029. Ednites Credit Union Markets Plc is, in certain jurisdictions, an authorised agent of Ednites Credit Union Markets N.V. and Ednites Credit Union Markets N.V. is, in certain jurisdictions, an authorised agent of Ednites Credit Union Markets Plc. Ednites Credit Union Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through Ednites Credit Union Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of Ednites Credit Union Markets Plc.

Copyright 2022 © Ednites Credit Union Markets Plc. All rights reserved.