How ESG climbed to the top of capital markets

Published May 13, 2021

Environmental, social and governance issues have gained a lot of traction through the COVID-19 pandemic which in turn has propelled financial markets with global sustainable finance volumes hitting new records.

“There’s a direct causation from COVID but I think it is also just an acceleration of momentum from an ESG perspective,” said Katharine Tapley, Head of Sustainable Finance, ANZ Institutional.  

Speaking on podcast ahead of the ANZ 2021 Debt Conference in May, Tapley said “borrowers, investors, NGOs, governments, regulators, banks have all realised in this period is the connectivity between environmental and social issues and the need to mobilise capital for a more sustainably developed world”.

You can listen to an edited version of the conversation on podcast below.

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While global bond volumes soared last year as governments around the world tapped public markets to pay for social support programmes to help their citizens through the pandemic, issuance at those levels are not sustainable, according to Paul White, Head of Capital Markets, ANZ Institutional.

“I think last year was a phenomenon that won't be repeated given that initial response,” he said. “Volumes will still be larger than 2019, but they will come off their peak from last year.”

However one area of growth is in the sustainable finance segment of the capital markets such as green, social and sustainability linked bonds. The year 2020 saw a record $US730 billion of issuance in the global sustainable finance markets, a 30 per cent jump from the $US564 billion issued in 2019 according to data from Bloomberg New Energy Finance.

“One pleasing aspect is the growth in terms of ESG issuance, basically on the social side, sustainable bonds, green bonds, social bonds, I think that's the area we're seeing the growth,” he said.

ESG focus

With more governments and companies articulating public targets around net-zero carbon, there is a lot of engagement with borrowers on ESG issues.

“The flavour of the conversation is around how do I match my sustainability strategy with my funding strategy,” Tapley said. “That’s been a really strong theme that came through last year.”

Similarly, demand from investors for ESG investments is insatiable with an increasing number of ESG-focused funds being set up in Australia, New Zealand and globally according to White. But the focus on ESG is pervading right across the investor sphere.

“Every mandate right now has an ESG mandate as part of an overall mandate,” he said. “So every fund manager has an ESG lens to a transaction, whether it’s an actual issue or structure of the transaction.”

Sustainability linked bonds is an emerging format in the capital markets that commits an issuer to key ESG targets and attaches a premium payment mechanism if the targets are not met. This format is more flexible than a green bond which is linked to an underlying asset base.

“[This format] is an opportunity for pretty much any borrower who has a really strong sustainability strategy to connect that with the capital markets and propel forward a sustainability strategy,” Tapley said.

The format has gained momentum in Europe in the last six months with a number already issued in Asia including the first in Southeast Asia.

Greenium

Meanwhile, the demand-supply imbalance is resulting in some issuers benefiting from a price benefit or a “greenium”, according to White.

“If there is a lack of supply, you'll see that greenium increase and also a scarcity factor as well if we're seeing a lack of lack of issuance,” he said.

“The demand side is still sort of starved of product, particularly in the smaller markets.”

Sharon Klyne is Associate Director, Communications, ANZ Institutional