Financial instruments help companies make progress towards ESG goals, according to execs from BNP Paribas and JPMorgan Asset Management
- Sustainable investing has grown exponentially over the past few years, along with the financial instruments to fund them.
- Leaders from BNP Paribas, JPMorgan Asset Management, and IDA Ireland described funds helping companies at every stage of going green.
- The talk was part of Insider's virtual event "Financing Net-Zero," presented by IDA Ireland, on Thursday, May 13, 2021.
Sustainable financing has grown significantly in recent years as corporations, governments, and institutions invest in ESG (environmental, social, governance) initiatives. Even companies that are still reliant on fossil fuels can leverage financial instruments to help them fund progress toward sustainability.
At the same time, with so much at stake, companies are expected to demonstrate a genuine commitment to outcomes, and new and potential regulations are adding to the pressure for transparency.
The various financial instruments funding sustainability initiatives were discussed by panelists on Insider's virtual event "Financing Net-Zero," presented by IDA Ireland, which took place on Thursday, May 13.
Moderated by Insider's capital markets correspondent, Aaron Weinman, the session featured Jennifer Wu, global head of sustainable investing at JPMorgan Asset Management; Anne van Riel, co-head of sustainable finance capital markets at BNP Paribas; and Kieran Donoghue, global head of strategy, public policy, and international financial services, at IDA Ireland.
"The markets have grown exponentially," BNP Paribas' van Riel said. "In the first four months of 2021, we have already surpassed the total volumes in the sustainable bond market for 2019. In recent years that has grown from the more traditional green bonds ... to a wider range of different types of bonds that are issued - social bonds and sustainability bonds."
"There is a wide range of different types of instruments now available to us as investors," said Wu, from JPMorgan Asset Management, describing the rise in "sustainability linked bonds." That's a format used when there isn't a dedicated use for the proceeds, but the company commits to targets toward green goals within a specific time frame.
Funding progress for carbon-emitting companies
Many companies are already incentivized to go green, according to IDA Ireland's Donoghue. "Many of our client companies have already publicly subscribed to a net-zero, so that's already part of their strategies," he said. "The vast majority of the companies and sectors in our portfolio are not from heavy carbon-emitting industries as a general rule...but those that do emit carbon are part of the EU's Emissions Trading Scheme...[and] have a good plan in place to progressively reduce their carbon footprint over time."
For traditionally rooted, carbon-emitting companies, or companies transitioning to sustainable systems, there are financial instruments that can also help fund the progression.
"There's a number of high carbon-emitting industries where there's maybe no alternative yet in terms of technology that is low carbon," van Riel said. "We're really talking about industries that are essential to the economy, cement for example, or steel-making, where there's just no economically viable alternative yet for producing these products.
For those companies, transition bonds will finance projects that are intended to fund steps towards a more sustainable future, with regulatory guardrails in place to ensure they are legitimately on that path.
Increased focus on the "S" part of ESG
While the climate crisis, central to the "E" parts of ESG, is currently the top priority in the sustainability spectrum, the panel also acknowledged the importance of the social and governance targets in driving innovation and change.
In fact, the goals are inextricably linked. "If we want to make sure that we're investing in companies that are helping with the transition to net-zero, we not only want to make sure they have the right technologies in place," Wu said. "But we also want to make sure they have the right governance structure and talent. You can't have a good pathway to transition if you forget about the S and the G."
van Riel said the inclusion of social categories in bonds has been growing over the past year, and that the pandemic has created a greater awareness that specific minority groups were hit harder by the economic downturn that ensued. "There has been a bigger focus by companies to provide more assistance or direct its targeted funding or assistance to those groups," she said.
Minimizing the risk of "greenwashing"
The lack of consistent standards for reporting contributes to the risk of "greenwashing," when companies make unsupported environmental claims that are intended to deceive consumers and investors.
"We acknowledged that greenwashing is a risk and there is evidence that it has happened and continues to happen, in part because every business now wants to embrace the sustainability or climate action agenda," said Donoghue. "That said, we also recognize the interventions that policymakers and regulators have, have taken, which we believe will diminish the prospects of greenwashing over time."
Donoghue cited the EU's Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March 2021, as an important measure in the prevention of false claims and disingenuous goals-setting. "We think that will diminish the risk of greenwashing over time. And that right now we're on a much better path with respect to managing greenwashing in terms of the climate agenda discussion."