Although it has played an increasingly important role in recent years, the situation created by the pandemic has provided the impetus needed for sustainable finance to become one of the queens of the financial industry.
Along with digitization, the sustainable aspect has emerged as an important pillar of the European Recovery Fund, also known as Next Generation EU, on which the recovery of the European Union (EU) will revolve.
If the concept had to be defined briefly, one could say that all that funding, both private and public, is used to fund projects whose main mission is to achieve sustainable and socially responsible goals.
Continued global growth
In recent months, sustainable financing seems to be moving even further. As the analysts at the Banco Sabadell Research Department note, the volume of debt issuance against criteria based on environmental, social sustainability and good corporate governance broke records in 2020, although it still represents a small fraction of total debt.
The health crisis fueled a rebound in social debt issuance, which registered a year-over-year increase of 750%, according to Bloomberg data. Sustainable debt also showed very high growth, at 68%, while green bond issuance grew by 7%. Sustainability-related bonds (SLB) were consolidated as a new kind of debate.
In addition, they indicate that the dynamics of the ESG (Environment, Social and Governance for the English acronym) market has continued in the first half of 2021, mainly driven by the issuance of green bonds by European governments, such as Germany or Italy.
As for ESG loans, from the Banco Sabadell Research Department, they ensure that the stock it grew at rates of more than 25% in 2020, continuing the momentum of previous years, although this growth slowed to just over 10% in 2021. Loans linked to sustainability represent almost 50% of the stock ESG credit.
As for mutual funds, as stated by Banco’s Research Department, the demand for investments based on ESG criteria has grown rapidly and globally in recent years, but still has great potential.
Flows to ESG funds set records in 2020 and investor interest remained high in the first half of 2021. In addition, they add that nearly half of mutual funds in ESG assets are concentrated in Europe, but investments in this market are also in the United States, especially after Joe Biden’s victory.
Looking to the future, they argue that the main challenge for the ESG debt market is the homogeneous generation of data and ratingswhich would facilitate the implementation of tax incentives for investments or the issuance of ESG assets.
According to him, the publication of data by companies is very superficial and makes analysis difficult, and moreover there is a big difference in the allocation of ratings†
In any case, Banco Sabadell’s research department believes that the growth potential of the green bond market is huge, as the crisis caused by COVID-19 has boosted interest in sustainability and improving governance.
They point out that public institutions are likely to play a key role in the development of this market. In this sense, the EU has already announced that it will issue green bonds with the aim of financing 30% of the European Recovery Fund.
Several countries, for their part, have also expressed the intention to issue more green debt or enter this market. Within the corporate sector, Banco Sabadell’s Research Department noted that the market is still highly concentrated in terms of sectors and issuers, so there is room for improvement.
In terms of products, they confirm that bonds related to sustainability are likely to become more widely known thanks to the decision of the European Central Bank (ECB) to include them in its asset purchase programs and point out that another A sustainable financing tool with great potential is the bonds for the transition, aimed at companies that need capital to cope with their transition to a greener activity.
Global leadership role
In 2018, the European Commission approved the first Sustainable Finance Action Plan, which served as a preparatory step towards developing a regulatory framework at European level, which has positioned the region as a frontrunner in sustainable finance.
The taxonomy of sustainable economic activities is the pillar on which the rest of the regulations are developed. In asset management, the Sustainable Finance Disclosure Regulation (SFDR) stands out, which, as noted by Banco Sabadell’s research department, aims to facilitate the comparability of financial products marketed as sustainable and the greenwashing, that is, to prevent the marketing of financial products that do not contribute to the fight against climate change as green. To achieve this, it sets information requirements for product manufacturers and financial advisors.
Another central element of this regulation is the classification of investment funds according to their contribution to sustainability. According to Banco Sabadell’s research division, the SFDR is a key element in closing the data gap related to sustainability in the markets, a pressing issue for investors. Its main contribution is to increase transparency, which will promote the development of sustainable finance.
From a business perspective, several international initiatives have emerged such as the Net-Zero Asset Owner, a group of institutional investors who, under the umbrella of the United Nations, commit to align their investment portfolios with the Paris Agreement and net zero emissions. of greenhouse gases in 2050.
Campaigns such as #apoyamoslosODS, promoted by companies adhering to the United Nations Global Compact, among which Banco Sabadell stands out, promote the alignment of corporate strategies with the SDGs, achieving a multiplier effect and highlighting the commitment to the 2030 agenda.
What does sustainable investing add to an investment portfolio?
In recent years, an exponential increase has been observed in the use of ESG criteria when defining investment strategies. For Banco Sabadell’s research division, they have become a priority for the asset management industry in a context where investors, especially young people, are increasingly aware and committed to sustainability.
Institutional investors such as mutual funds, insurance companies, pension plans or sovereign wealth funds are the ones who attach the greatest importance to ESG criteria in their decisions.
Banco Sabadell’s Research Department indicates that the investor profile is normally much more focused on generating or preserving long-term wealth, which is in line with the philosophy of sustainable investing.
However, there is no consensus on the criteria that define this investment method, so that, for example, one investor avoids polluting companies in his portfolio, another can include them, but align the rest of his portfolio with the SDGs.
In any case, confirms Banco Sabadell’s research department, there are studies suggesting that investments subject to ESG criteria can deliver greater returns over the long term and provide benefits in terms of diversification and reducing wallet risks. .