Capital shift Environment and society increasingly drive capital allocation

In the face of the climate crisis, the COVID-19 pandemic and social justice movements, public sector bodies, companies and banks are accelerating their reallocation of capital.

A year ago, only 6% of issuers globally expected to leave their deployment of capital unchanged in the face of environmental and social challenges and opportunities over the next five years. Now this group has halved to 3%.

Indeed, it has fallen as low as 1.5% in Asia and to zero in the Hong Kong SAR. Conversely, some important markets are moving more slowly in this direction, though only Germany, at 8%, is still above last year’s average global proportion of issuers expecting to make no changes in capital allocation.

Others at or close to last year’s level include Canada (6%), France (6%) and Saudi Arabia (5%).

Similarly, more issuers anticipate making ‘substantial’ changes than last year. The global average has risen clearly from 25% in 2019 to 32%. Asia at 43% is again in the vanguard, while Europe on 20% and the Americas at 27% are the laggards.

Equally, the proportion of issuers globally expecting to make a ‘noticeable’ change has grown from 40% a year ago to 45%. Europe leads this category, at 54%, led by France (56%). Middle Eastern issuers (48%), especially in the United Arab Emirates (51%) are also above average.

As a result, over three quarters of respondents are now in the two categories indicating the strongest expectations of change in the near term. Only two thirds were in 2019. The change is understandable – and encouraging – considering that governments in many parts of the world are sending stronger signals that they want the economy to shift to a low carbon model. Mainland China, for example, joined the list of countries that have set a date to go carbon neutral in September.

Capital providers’ perceptions Banks and investors care more about environment and especially society

Issuers not only have their own plans for shifting their capital. They are also keenly aware what their capital providers think.

As in 2019, we asked issuers a detailed set of questions about how much they think three kinds of investor — shareholders, bondholders and bank lenders — care about their environmental performance and their impact on society.

A year ago around 10% judged that these investors had little or no interest in their E&S performance. Now these proportions are all in single digits. Around 7% of issuers globally report that their bank lenders care little about their environmental performance (using the lowest two points in the five point scale that respondents applied, equivalent to caring not at all or not much). The figure for both bondholders and shareholders is just 3%.

Banks appear to be focusing more sharply on social impact in the current environment. Only 2% of issuers now judge that their banks care little about this, while 75% say they are concerned. A year ago, only 57% thought this. Issuers perceive bond and equity investors as highly focused on social impact, too. Only 5% and 4%, respectively, see them as caring little about the issue. Moreover, some 73% of issuers globally report that their shareholders now show at least quite a lot of concern over social impact, up from 69% a year ago. Meanwhile 64% say this of their bondholders, versus 57% in 2019.


of issuers expect to redeploy capital in response to environmental and social challenges and opportunities over the next five years

In a separate question, we asked issuers if they were confident their investors — of all kinds — understood their efforts towards sustainability. The answers are encouraging.

Only 12% globally judge that investors do not understand what they do (9%) or do not pay attention to it (3%). Europe is the region where issuers are most critical of their investors: 12% feel they lack understanding and 4% that they fail to pay attention.

By country, Chinese (23%) UK (19%) and Canadian (16%) issuers are notably more likely than average to feel investors misunderstand them. German, Canadian and French issuers are most likely to feel overlooked (10%, 6% and 6%). Conversely, no Middle Eastern issuers say their investors fail to pay attention and only 3% that they lack understanding. At 1.5%, Asia is also below average for lack of attention.

Climate change impacts Expected crunch time deferred further into future

Perhaps reflecting the more immediate challenge of the COVID-19 pandemic, the survey suggests issuers are slightly less concerned about climate change than a year ago.

A very similar proportion (37% compared to 2019’s 38%) report that it is already impacting their business or activities, but others have pushed the threat further out to the future.

Globally, 18% expect it to impact them within 10 years while 27% see it as a longer term threat 10 to 30 years away. Last year these percentages were reversed, at 30% and 15%.

At 55%, Europe is the region that reports the highest level of impact (measured by the assessment that climate change is already affecting the respondent). While France and Germany both report slightly above average impact, the UK leads on this with 54%. The US is also fractionally above average at 39%, while mainland China stands out as the least concerned major market (21%) outside the Middle East (11% on average, 10% in the UAE).

Conversely, Europe has fewest subscribers to the ‘impact within 10 years’ scenario. It records 15% on this — and France just 12% — while other regions all gather around 20%. A third of UAE issuers take this stance, while Hong Kong SAR (23%) and Canada are also above average (22%).

At the same time, around 5% of issuers believe that their organisations will not be affected by climate change.

Indeed, 11% of those in the Middle East take this view (13% in Saudi Arabia, 12% in UAE), as do 10% in Germany. At the other end of the spectrum, only 1% of issuers in the UK believe this. Major Asian markets have similarly low proportions (2% in Singapore, 3% in mainland China).

Outright climate change denial is very limited among issuers, at just 2% globally. It is most pronounced in Canada (10%) and France (8%), with none in mainland China or the Hong Kong SAR taking this view.

Sustainability-linked borrowing Gaining users and satisfaction

One of the most successful recent innovations in corporate finance has been sustainability-linked loans.

These are distinct from green loans, in which the borrower commits to using the proceeds for environmental purposes. In a sustainability-linked loan, the borrower may use the proceeds for whatever purpose it wishes. The transaction’s sustainable nature is that the company is incentivised to raise its overall environmental or social performance because the interest margin can be reduced if it hits pre-agreed targets. Equally, the margin may be raised if the borrower underperforms. A year ago, 75% of respondents globally regarded sustainability-linked loans (SLLs) as very interesting or potentially interesting, while 20% judged that they were unlikely to suit them. Now 30% of issuers say they already have experience of SLLs or green loans.

This compares with 40% of issuers saying they have raised debt through the longer established product of green, social and sustainable bonds, in which the proceeds must be used for specified purposes. Moreover, a third of issuers say they view ESG-linked and green loans as interesting and may finance through them in future. This suggests further conversion of issuer interest in the product into transactions is close.

The Americas (40%) and Europe (39%) lead growth in ESG-linked and green loans so far. There has been much less activity in the Middle East (3%) — though nearly half of those surveyed (46%, a proportion unmatched in any other region) may use the product in future.

At a country level, take-up has been strongest in France (60%), the US (56%) and Germany (52%). Mainland China (44%) is also above the global average, whereas the UK (33%) is somewhat below. Issuers’ satisfaction with the product is striking. Globally, half of respondents reported themselves very satisfied, as did 55% of green, social and sustainable bond issuers.

Factoring in substantial levels of moderate satisfaction (slightly higher for ESG-linked loans at 37% versus 35% for labelled bonds) as well, the newer debt financing tool is already achieving very similar performance.

Chinese (95% very or moderately satisfied) and German issuers (90%) are particularly enthusiastic about their ESG-linked loans. The tiny proportion of UAE issuers that have taken out ESG-linked loans were all very satisfied by them. Satisfaction levels are comfortably above 80% in all four regions.

The evidence suggests sustainability-linked loans — as well as their newer and much rarer cousins, sustainability-linked bonds — will continue to proliferate, as companies find them a useful way to communicate their sustainability priorities to stakeholders, including banks and the wider capital markets.