EXECUTIVE SUMMARY
- Just as companies juggle the dual imperatives of greenliness and profitability, investors need to juggle the accelerating need to increase allocation to green and sustainable bonds with the time-consuming requirement to audit assets that lay claim to fulfill a green mandate.
- In common with credit ratings, ESG ratings rely inevitably on the quality of information provided, and the judgment of rating practitioners; however, there is as yet no common language of ESG ratings and no dominant market player to harden definitions or key metrics and provide regulated scrutiny.
- ESG determinations are necessarily more art than science given the ad hoc approach to evaluation and despite attempts at systematic data gathering. Assigned measures are hard to interpret and have no recognised linkage with credit spreads yet.
- Just as environmental decision-taking is bedeviled by trade-offs, so ESG investing is prey to unseen risks and contradictions as a function of environmental ignorance, calculated trade-offs and ESG-unfriendly structures or jurisdictions.
- As the market becomes more sophisticated, it seems likely that pricing of such ESG risks will become more accurate and timely creating another lever for volatility in corporate credit curves.
- As attitudes to delivering ESG principles harden, the credit impact for big polluting companies may escalate if investors’ propensity to green screen intensifies and impact investing principles begin to govern investment decisions. Currently, shareholder actions on ESG issues through resolution proposals, proxy fights and even litigation do not appear to have much price impact.
- Herein, in Part Three of our ESG series, we discuss the current state of regulation, market conventions and developments that may crystallise ESG risks and pricing thereof.
