Another Wakeup Call for Business: Banks Eye ESG Lending Market

In another sign that the financial world is taking sustainable investing seriously, more banks now have their eyes on the $23 trillion global market for sustainable investment.

In particular, corporate lending tied to some measurable sustainability metrics—like cutting emissions or reducing food waste—surged eight-fold in 2018 to $36.4 billion, reports Bloomberg NEF.

“If this catches on, it is going to be the next big investment opportunity,” Kajetan Czyż, director of the Sustainable Finance Program at the Cambridge Institute for Sustainability Leadership, told Bloomberg. “Banks need to adapt to this new suite of opportunities this shift creates.”

But are companies heeding the wakeup call that is coming from financial institutions, investors and shareholders to provide the information they need to make those investments? If they don’t, investor pressure could surge, in the form of shareholder resolutions or a push for regulatory intervention.  

The signs of how fast sustainable investing has become mainstream are impossible to ignore:

• A new survey from the Morgan Stanley Institute for Sustainable Investing and Bloomberg showed that 75 percent of U.S. asset managers say their firms now offer sustainable investing strategies, up from 65 percent in 2016.
• In a PwC global survey of the private equity industry, 91 percent of investors said they now had an ESG (environmental, social and governance) or sustainable development policy in place or in development, increasing from 80 percent five years ago. 
• S&P Global Ratings announced that it has started to include ESG sections within corporate credit rating reports. That shift meshes with recommendations from the United Nations Principles for Responsible Investment that credit rating agencies be more explicit about credit-relevant ESG risks and opportunities in rating reports.
• And while the Green New Deal, as TriplePundit has reported, is facing some political headwinds, many investors are all for funding the deal, Bloomberg reports, with their sights on the $12 trillion sustainable investing market within the U.S.

Investors want more data, and they want it now

One of the hurdles to sustainable lending, as Bloomberg reported, is the the lack of agreement on how to objectively gauge the impact of a company’s social responsibility plan. While some loans are tied to a measurable metric, or key performance indicator (like CO2 emissions), others rely on ratings from one of more than a dozen agencies—and the scoring methods aren’t consistent. Several standards organizations want to make it easier for companies to report, and they’re collaborating to provide greater clarity on reporting.

But while the number of companies that disclose critical ESG information is rising, an argument persists that the actual quality of the information is lacking.

According to a recent report from the sustainability nonprofit organization Ceres, 51 percent of the 600 largest publicly-traded U.S. companies mention climate-related risks in their financial filings, up from 42 percent in 2014. Nevertheless, the vast majority of companies only disclose climate-related risks as regulatory risks (68 percent) or as physical risks (55 percent), with a smaller percentage citing reputational risks. Boilerplate language about future carbon-reducing regulations has become commonplace, further adding to investors’ arguments that ESG-related disclosures lack transparency.

Shareholder proxies turn up the heat

And with shareholder proxy season upon us, companies are facing a surge in environmental- and socially-focused resolutions by impatient activist investors. The 2017 and 2018 proxy seasons, for example, saw majority votes for climate change-related shareholder resolutions at some of the largest energy companies in the world, including ExxonMobil, Occidental Petroleum, PPL and Kinder Morgan, according to Ceres.

The 2019 proxy season is not likely to be any different, predicts Morningstar’s Jackie Cook. Cook's proxy primer shows that 38 percent of the shareholder resolutions appearing in the annual meeting proxy materials of U.S. public companies addressed ESG issues (187 of 488 total). Of these, 10 were supported by a majority of shareholders.

An early trickle of proxies and voting results, Cook found, pointed to:

• Gun safety and the opioid crisis as key reputational risk issues for weapons retailers and pharmaceutical companies.
• Disclosure of GHG emissions targets for oil and gas companies are in line with the recommendations of the Taskforce on Climate-Related Financial Disclosures.
• Gender will be another important issue addressed in resolutions that request workplace diversity and pay-equity disclosures, a movement women leaders are leading.

If not the carrot, then the stick

When shareholder pressure isn’t enough, investors have moved to bring regulators into their corner to prod companies to disclose ESG information.

In January, the International Organization of Securities Commissions released a statement urging securities regulators to actively engage public companies to disclose material ESG information to investors. It said issuers should provide "full, accurate, and timely disclosure of financial results, risk and other information (that) is material to investors' decisions" and that while ESG issues might be considered non-financial issues, they still have both short-term and long-term impacts on risk management and investment returns.

Watch for this debate to continue; for example, in the U.S., a group of investors have petitioned the Securities and Exchange Commission (SEC) to require mandatory ESG disclosure.

It’s safe to say most companies would prefer not to have regulators set the requirements for ESG disclosure. In that case, companies need to do a much better job of engaging investors. Most companies, according to Ceres, still share information in ways that reinforce the misconception that these issues are tangential and not material. Many companies are still falling short in providing investors with the information they need to understand and value the positive impacts of sustainable business strategies on corporate health and financial performance.

When the stars align, credit follows

If sustainability information is robust enough, loans tied to sustainability could follow. The result can lead to a boon for companies, as San Francisco-based warehouse developer Prologis discovered when it received $3.5 billion ESG financing in January. The line of credit has a sustainability-linked pricing mechanism that reduces the borrowing spread if certain environmental sustainability benchmarks are achieved each year.

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