The rise in capital-market activities described as ESG-focused or sustainable over the last two years has been elevated and widespread, touching all areas of the market. Regulators, asset managers, finance-trade organisations, investment banks, corporates and investors have all participated in this green wave.
This growing prominence of green finance is often pointed to as a typical sign that we are reaching the height of a bull market – with the implication that the rush of ESG-focused activities was an ephemeral phenomenon in the waning months of the economic cycle.
Yet if this were true, sustainable capital-market activity would have come to an abrupt halt in the first half of this year. Looking back over the past six months, this is clearly not the case. Instead, evidence suggests that the green evolution in finance has been resilient throughout the coronavirus crisis and represents a long-term, secular change.
A closer look at a small sample of green-finance activity and regulatory developments in the first half of this year supports this view (click on the drop-down boxes to find out more).
The coronavirus pandemic has also resulted in a paradigm shift for responsible-investment strategies – many of which outperformed during the crisis. Up until the sell-off in March, responsible portfolios were often used a risk-mitigation tool: investors incorporated ESG factors with the view that it would help them avoid companies that destroy shareholder value.
But the pandemic has ushered in a heightened sense of social awareness. Policy makers, companies – and indeed society as a whole – now realise there is a need to build resilience in healthcare, food and water security, as well as across supply chains. Moreover, the crisis has also put climate change and workers’ rights under the spotlight.
This shift in consciousness can be seen when looking at sustainable fund launches. Despite the volatility experienced during the first quarter, about 100 sustainable funds were launched throughout the world in Q1 2020, up from just over 80 in the same period a year earlier (see figure 1).
Figure 1. Holding up: global sustainable fund launches
Source: Morningstar, as at March 2020.
Trends in active equity fund flows paint a similar picture. Outflows of about 4% have been recorded since early 2019, while ESG funds have enjoyed comparable inflows of more than 18%. The shift was most evident during the first quarter of this year, when – despite the volatile market – inflows increased by 90% year-on-year.
The increase was most notable in the US – which lags behind Europe in terms of assets under management in sustainable strategies – and where net flows reached a record $10.5bn. To put this into perspective, total net flows in 2019 were $21.5bn – which was already four times the previous calendar-year record. We expect this stratospheric growth to continue.
We can see a similar phenomenon in the fixed-income universe. The Climate Bonds Initiative estimates that at least $49bn-worth of US green bonds will be sold this year, up from less than $1bn in 2013. And during the first quarter, issuance of sustainability-tagged bonds grew by 70% year-on-year (see figure 2).
Figure 2. Bounding ahead: sustainable bond issuance
Source: BloombergNEF, as at March 2020.
Also notable is the changing mix of bonds issued: while the number of green bonds issued declined on a year-on-year basis for the first time in months, this was more than offset by so-called social and pandemic bond issuance.
We see this as an important step in the development of mature, sustainable credit markets. It shows that there is a keen source of demand for a plethora of sustainability-linked bonds – particularly during periods when they can help to solve an urgent problem.
The rise in green capital-market activity over the last six months has been nothing short of astonishing – and all the more so given that policymakers, companies, investors and individuals have been blindsided by the wide-reaching impact of the coronavirus pandemic.
Yet it seems that the exogenous shock of the virus has prompted a rethink – and a realisation that there is an urgent need to prepare and protect against future global threats. During these turbulent times, a focus on good ESG behaviours is more important than ever and can help highlight the changes that we need to make to create a more equitable, sustainable society.
