Punishing start to the year for ESG investment

Hello from New York. Reports are starting to show it was a punishing start to the year for the environmental, social and governance (ESG) investment sector. Cash into ESG funds fell to $75bn, the lowest level since the third quarter of 2020, according to a report published by the Institute of International Finance on Thursday. The inflows in March, $15bn, were at their weakest since March 2020. The paltry sum stemmed from concern about technology stocks, which were heavily favoured by ESG funds, the IIF said. And higher oil prices tempted investors to shelve their eco-enthusiasm for energy stocks.

The figures again raise the question: Did ESG peak in the first quarter of 2021?

For today’s newsletter, I dig deeper into first-quarter results for green and sustainable bonds. Simon talks to Rajiv Shah, head of the Rockefeller Foundation, about a new investment initiative he is working on to spur low-carbon projects. Kristen reports on strong words about ESG from Anne Simpson, a former official at Calpers. Please read on.

Does divestment work? That’s the question our next Moral Money Forum report will seek to answer. Today’s pressure on investors to sell out of fossil fuel stocks echoes past campaigns focused on tobacco or guns, but is divestment effective or is engagement the better strategy? We want to hear your thoughts as we begin our reporting, so please share them via this survey.

Green bond volumes are down, but there’s hope for a rebound this year

Bedevilled by rising interest rates around the world and a “radically uncertain environment” stemming from Russia’s invasion, green bonds were certain to have a difficult start to the year.

In the first three months of 2022, green bond issuance declined 7 per cent to $110.4bn — a two-year low, according to data Refinitiv published on Thursday.

But the big story for the quarter was in sustainability-linked bonds, which are experiencing strong growth despite the headwinds for fixed income broadly. Sustainability-linked bonds had $22bn of issuance in the quarter, up from $8.8bn a year ago, Bank of America said on Thursday.

Recall that for sustainability-linked products, the interest rate is tied to certain targets such as slashing carbon emissions. Hit the target and the borrowing cost goes down. Now sustainability-linked bonds are increasingly being issued by companies that might not have projects big enough to warrant a green bond, but that can reach certain eco-friendly goals.

Despite the first-quarter slowdown, HSBC said it was sticking with its December prediction that there would be $800bn of green bonds issued worldwide in 2022, up 60 per cent from last year. The bank reasoned that companies outside the financial sector ramped up green deals in the first quarter.

“I don’t see investor demand going away, and I don’t think the projects have gone away either,” Dominic Kini, green bond and credit strategist at HSBC, told Moral Money. “Typically, periods of market disruption have seen a fall in supply followed by a recovery.”

Additionally, nuclear energy might become a candidate for green bonds. Despite the controversy it ignited, nuclear power is being added to the EU taxonomy.

“We think green bonds are unlikely to be used for gas given the drive to reduce dependence on gas. But nuclear energy might be seen as more acceptable than before the current crisis,” the bank said.

Underwriters and companies must be careful when pushing the boundaries to define green and sustainable debt. At a conference in New York last month, an official at one of the world’s largest pension funds said it held sustainability-linked loans but did not consider them sustainable. The step-up penalty looked trifling, he said (the conference was under Chatham House rules). A company could take the money — especially if the deal is hyped up and oversubscribed — and pay the step-up penalty.

A panellist from one of the world’s largest private-equity groups said in response that, yes, there is a lot of greenwashing in this space.

Consider yourself warned. Patrick Temple-West

How philanthropic capital can fuel billions for low-carbon development

The UN climate summit in Glasgow in November underscored the vast amounts of capital that will be needed to drive the global energy transition — and the dire lack of clarity on how that cash will be mobilised. But one new initiative announced at the conference offered a fresh approach. The Global Energy Alliance for People and Planet (GEAPP), a coalition of charitable foundations and multilateral lenders, wants to unlock $100bn for low-carbon development this decade.

Five months on, I caught up with Rajiv Shah, head of the Rockefeller Foundation, which spearheaded the GEAPP, and the alliance’s newly appointed chief executive Simon Harford. The GEAPP has secured $1.5bn in funding commitments from Rockefeller, the Ikea Foundation and the Bezos Earth Fund, with additional promises from multilateral institutions — including the World Bank and the European Investment Bank — that bring the total pledged so far to more than $10bn.

The goal, Shah and Harford said, would be to use these funds to spur larger flows from private companies and investors who had been deterred from this space by perceived risk or technical obstacles. Shah pointed to Rockefeller’s work in India, where it spent tens of millions of dollars supporting the early development of “micro-grids” offering solar power to poor communities. That prepared the ground for a partnership with Tata Power, which has spotted profitable opportunities in the space.

The story illustrates how philanthropic capital can go further than multilateral development banks to nurture early-stage growth in this field, said Shah, who ran USAID during the Obama administration. “It’s hard for a multilateral institution, to take those risks . . . we weren’t hitting our milestones, let’s put it that way, until the technology was refined.”

Multilateral lenders have been under pressure to demonstrate their commitment to climate finance — particularly the World Bank, which came under fire for weakening development banks’ joint statement on the subject at COP26.

A strength of philanthropic capital, said Harford — who used to run the Africa operation of the impact investment group Actis — is the speed with which it can be deployed. When companies are dealing with multilateral lenders, he said, “it can take three, five, seven years to go from idea to financial close when the money actually flows”.

The idea behind GEAPP is that the charitable foundations will provide the financing and technical support to get projects to the stage where MDBs, and private investors, will be able to deploy much larger amounts of capital. It’s also working with developing country governments to address regulatory and institutional weaknesses that have scared off investors.

The GEAPP’s approach has won enthusiastic backing from top climate economist Nicholas Stern. But while it may help to stimulate increased activity from MDBs, he said, they have a huge way to go. Stern estimates that developing economies (not including China) will need $2tn a year by 2030 to fund low-carbon development, of which MDBs will need to provide about $300bn. That’s about triple their current level of support.

Stern added that charitable foundations — and in some cases the billionaires behind them — could help to address this. “If Bezos wants to talk to Boris Johnson, he can, and if Bill Gates wants to talk to Boris, he can. If Rockefeller wants to put pressure on the government, they can, and I know they do. So that is an extremely important role for the philanthropies.” Simon Mundy

The beginning of the end of ESG?

As questions around energy security take the main stage, there are whispers over whether ESG will be “cancelled”. And they’re coming from former ESG advocates themselves.

After 11 years in the world of pension funds, Anne Simpson entered the private capital world in January as Franklin Templeton’s global head of sustainability. Since then, she’s been beating a new drum: RIP to ESG.

“This marks the end of looking at financial markets through ESG,” Simpson said on Tuesday at a private capital conference in New York. “We cannot capture the true risks of what’s going on simply by this cute little acronym that has gotten popular.”

Privately, other ESG proponents have also begun to groan that the language of the financial movement has become mere fluff — and that Simpson is just taking on the mantle as spokesperson. They say it’s time to get serious, forget the acronyms, the myriad task forces and the soggy alphabet soup that the ESG world has become stuck in over the past years. Over recent weeks investors have told Moral Money that, at the very least, the acronym must be unbundled.

A realistic, just transition is going to require some trade-offs — a point that many are keen to dismiss, Simpson said. But, short-term trade-offs are needed to uphold investors’ long-term duty to stakeholders.

A social purpose has been baked into the financial system since the 1980s when pension funds overtook market wealth. “It’s not just top hats and rocket ships. This is money that people have saved for retirement or a rainy day,” Simpson said.

Now that so many retail investors have skin in the game, the need to address the less rosy realities of ESG has become more urgent. For example, it’s imperative to be clear-eyed about the true impact of an energy transition, Simpson said; this means addressing the good and the bad.

“Even if you’ve shifted to investing in wind turbines, you’re investing in cement, steel and shipping.” Simpson added. “We’ve got to take a more holistic approach to the energy transition.”

As even ESG’s backers start to turn on their own industry, many are wondering what the future of corporate sustainability will look like — especially in the face of a global crisis. Industry veterans have started to shout the answer: drop the aesthetics of ESG and start answering the hard questions. Kristen Talman

Chart of the day

Climate-related financial risks are getting growing attention — but a new survey from BCG casts doubt on how seriously institutional investors are taking them. Just one in 20 investors polled by the consulting firm said that climate and ESG-related issues were among the three risks they took most seriously. And only 11 per cent of the 150 investors polled indicated that ESG is a primary consideration in day-to-day investment decisions.

Smart read

• A growing number of environmental, social and governance-focused bond funds have been hitting the market of late. But it’s far from clear that bondholders can make a serious difference to corporate behaviour without an overhaul of their ESG playbook, warns fixed income fund manager Ellen Carr in this punchy guest column for the FT.