How ESG is changing the face of finance
Greg Fyfe, Head of Sustainable Finance, Standard Bank Group
Not long ago, environmental, social and corporate governance (ESG) issues were considered largely peripheral issues, and sustainable finance was often dismissed as something for fringe investors. There was also a mistaken belief that ESG considerations came at a cost to an organisation’s bottom line. These myths have been utterly debunked.
Trend analyses confirm that companies that take ESG seriously are outperforming their peers who are laggards in this space. Over the last decade, the MSCI EM ESG Leaders Index has significantly outperformed the MSCI Emerging Markets index, while in FY20 the iShares ESG MSCI USA ETF (the largest of its kind, with more than USD7.1 billion in assets under management) returned 0.6% YTD, compared to the S&P 500, which was down roughly 1%.
Sustainable Finance is growing exponentially. In Q1 2021, sustainable finance accounted for 11.5% of all debt market capital activity Total sustainable finance debt issuance in Q1 2021 topped USD400bn, which represents both a new quarterly record, but also a remarkable 234% increase on Q1 2020. Global investors are also becoming increasingly mindful of sustainable practices and sustainable investing, with the 2020 MIRA ESG Report finding that 58% of investors have increased their ESG focus over the past five years. Put simply, ESG considerations are simultaneously becoming increasingly important to the suppliers of global capital as well as the users of that capital. We see this trend as only gaining momentum in the future.
Opportunities for positive change – and rewards
Sustainable finance is a growing market, and one that holds significant opportunities. Standard Bank has become a leading player in the capital markets space, both issuing Africa’s largest green bond as well as arranging sustainable and sustainability-linked bonds for our clients, across Africa.
Standard Bank has also successfully provided a number of green, social and sustainability-linked loans to clients across the various sectors in which we operate. The sustainability linked loans are a sub segment of the sustainable finance market that clients are particularly interested in. These are loans that are designed to encourage our clients to achieve positive results across certain environmental, social or governance key performance indicators.
These indicators may be linked to environmental (emissions reductions, waste control, water management, electricity efficiency, etc), social (diversity, BEE, empowerment, gender issues, etc), or governance issues or indeed a combination of these. The loan terms would then be linked to the achievement of these predetermined sustainability targets.
Reassessing what’s most important
Sustainable finance is now becoming mainstream. What’s behind this shift? Covid-19, for one. The pandemic has accelerated many changes in the market, giving people across the world an opportunity to take a breath and reassess what’s most important.
More people are becoming conscious of the environmental consequences of decisions that are taken, and people are demanding that action be taken. A 2020 Boston Consulting Group survey found that the pandemic made about 90% of consumers more ESG-conscious, while a 2020 Schroders Investor Study showed that 47% of people around the world are attracted to sustainable investments because of their wider environmental impact.
In addition, the pandemic has made social inequalities acutely apparent, especially in Africa, and this has undoubtedly raised investor awareness of the broader social impact of investment decisions. As the continent recovers from the economic fall-out from the pandemic, we anticipate that the market for social bonds and loans will continue to grow.
The bottom line is that, for investors, for borrowers and for everyone, ESG is now a real and urgent focus.