Drivers for sustainable finance Returns and social pressure rise in importance, values weaken

The drivers behind issuers and investors’ focus on the environment and society appear to be shifting. Risk/return considerations and external pressures have risen in relative importance, while values have declined.

In 2019, when we asked issuers and investors why they cared about environmental and social issues, the most commonly cited reason by both groups was their values. Among investors, 62% said ‘we believe it’s right to care about the world and society’ — well ahead of the belief that caring about E&S issues ‘can improve investment returns and/or reduce investment risk’.

For issuers, the equivalent percentage was 65% — far ahead of the 46% who said they cared because regulators required it.

This year, the position has changed markedly. Now, only 38% of investors cite their values — it has been overtaken by three other factors. Issuers are still more likely to cite values than any other reason, but the percentage naming this has fallen from 65% to 55%.

It is not just values towards which respondents seem colder this year. Smaller percentages of them cite most of the possible reasons for caring about E&S, as the graph on page 8 shows. This may be because engagement with E&S is now more of a normal activity for many — the reasons that drove them to it may no longer feel as pressing.

“For issuers, despite a year-on-year decline, values remain the strongest driver globally for focusing on the environment and society”

But the pattern that values has retreated, relative to the other reasons, is clear. For both groups, only one issue is mentioned by a higher percentage this year than last.

For issuers, it is that ‘NGOs or pressure groups want us to’ — this is now the second most common reason for issuers, at 34%. For investors, the wishes of clients have become more important, mentioned by 37%.

But the top three drivers for investors to care about E&S issues are the possibility of improving risk and returns, cited by 49%, ‘society expects it’ (43%) and regulators requiring it (41%).

There are regional variations. The region that cites values most — the Middle East — still has 47% of investors quoting this (50% in the UAE). In the UK 47% and in the US 45% of investors also take this stance. In mainland China only 25% do, Germany 29%, Canada 32% and Asia more broadly 33%.

Social expectations for investors are especially strong in the Americas (55%), while in the Middle East 58% are motivated by regulators.

For issuers, the influence of customers is particularly strong in the Americas, at 52%, now ahead of values. In the Americas (45%) and Europe (41%) NGOs are more influential than in the other regions. In the Middle East only 12% cite the wishes of NGOs, 4% customers and 1.5% employees.

Environmental and social disclosures Issuers stay ahead and expect to reveal more

Market participants across the world are stepping up their disclosure of environmental and social performance, though issuers continue to lead investors by sharing more thoroughly.

In 2019, one in six issuers in our survey was not yet disclosing information about its E&S impact. This proportion has shrunk to just 6%. It is lower still in the Middle East (2%) and Asia (4%, though mainland China registers an above average 11%).

However, not all issuers welcome this development. Globally, 11%, and 19% in Asia, believe they disclose too much — up slightly from last year. The vast majority accept it, though. Nearly half (46%) expect to increase current levels of disclosure, either at their own initiative or to satisfy demands from investors or regulators. This has increased slightly from 42% a year ago. The proportion of these that welcome it has fallen somewhat, however — from two thirds in 2019 to just over half in the 2020 survey.

European issuers expecting to increase disclosure remain at last year’s level, nevertheless. They are also least inclined to view their current disclosures as excessive. The share of issuers that feel pressure from investors or regulators to increase their disclosures, but regard the current level as about right, is 13% in Europe, the lowest anywhere. This unwanted pressure appears strongest in the Middle East (36%) and Asia (27%).

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expect to increase current levels of disclosure

What information issuers disclose and the channels through which they disclose it vary widely. Sustainability strategies are the most common type of information.

Globally, 96% of issuers report these, of which 58% — and as many as three quarters of those in the Americas — do so in their annual reports. The high figures here are a sign of how widely it has become an accepted norm for issuers to address sustainability — but also that having a sustainability strategy is a loose requirement which is perhaps the easiest for companies to fulfil.

The next most common disclosures are strategies for climate change, which 91% of issuers say they report. However, only 54% are yet following the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Only 28% of issuers disclose these through their annual reports.

Investors deepen disclosure

Investors, meanwhile, have also improved disclosure in the past year. Our survey asked those that operate firm-wide policies on responsible investing or ESG issues — 51% of the total — whether their policies included certain disclosures. In 2019 only 24% of this cohort disclosed the ESG characteristics of their whole portfolios. This proportion has now reached 35% globally, 42% in the Americas and 46% in the US.

Moreover, 35% now disclose the ESG characteristics of selected portfolios, up from 25% a year ago. This rises to 40% in the Middle East. Similarly, 40% now disclose the environmental and social impacts of some portfolios, against 26% in 2019. This disclosure rises to 50% in the Americas. These increases appear to reflect greater demand from clients for more insight into the E&S impact of their holdings.

Alignment with the TCFD recommendations and other reporting frameworks has also advanced in the past year — 36% of investors report being aligned with these now — up from last year’s 32%.

Infrastructure opportunities Broad support for cleaner energy

Issuers and investors see sustainable infrastructure investment as an important priority and a source of attractive opportunities.

Our research explored which fields of sustainable infrastructure issuers and investors thought were most significant. The questions to issuers and investors were slightly different, reflecting the different ways in which they operate.

Issuers were asked a more general question: which technologies were the highest priorities for investment in the country where the respondent worked. This is because companies are specialised: a food business, for example, is unlikely itself to invest in hydrogen power. Issuers’ answers therefore reflect the general demand of the business community for each kind of sustainable infrastructure.

The question to investors was more specific, reflecting their much greater ability to invest directly themselves — ‘across all the countries where you invest, which forms of sustainable infrastructure do you think offer the most attractive investment opportunities?’ This difference may explain why investors are collectively a little more reserved in their enthusiasm.

To each group we offered the same options: eight kinds of technology, plus the option to choose ‘Other’. We invited them to choose as many as they wanted, and rank them, from highest priority to lowest. If a respondent chose something as top priority, we gave it 9 points, with 8 for a second priority and so on. The scores published here are simple averages of all responses. They therefore reveal both how broad the support for a particular technology is across the market, and the intensity of the respondents’ enthusiasm for it. Bearing in mind that the maximum score of 9 could only be achieved if every single respondent had chosen the same technology as first priority, it is clear that the scores of 4 and above for many technologies represent a strong consensus of support.

The dominant theme of answers is cleaner forms of energy, though investors’ single most popular area is water and waste water. The strongest support is among issuers, with scores of nearly 6 for clean renewable energy and forms of hydrocarbon seen as lower carbon, such as gas. The highest marks from investors are around 4.5 — for those two kinds of infrastructure and water and waste water. The support for renewables is broad. Issuers in Asia and the Middle East give it a score above 6 and Europe 6.9, with 7 in the UK. Issuers in the Americas are more restrained, with a score of 4.

The same pattern is seen with lower carbon hydrocarbons. Asia, Europe and the Middle East all assign rankings above 6, with 6.9 in the Middle East. Issuers in the Americas are more lukewarm at 3.6. Power storage is the one area where Americas issuers are more eager than the global average, giving a score of 4.2, though Asian peers are slightly keener, at 4.4.

Investors like water and energy

Water and waste water infrastructure is more appealing to investors — who give it their highest mark of 4.4 — than issuers, for whom it registers 3.7.

However, issuers in Asia, particularly the Hong Kong SAR and Singapore, do match global investors’ level of interest in water infrastructure. Although their enthusiasm for energy infrastructure is less universal than issuers’, investors do believe it offers attractive investment opportunities, with renewables and lower carbon hydrocarbons virtually equal at about 4.4.