But while statistics show investors’ appetite for firms with a strong ESG track record, if sustainable finance is to effectively play its role in the decarbonisation movement, financial markets must embrace new technologies capable of analysing raw data to limit greenwashing and ensuring businesses transition to long-term sustainable practices.
“One key development we have seen in the past year is the rise of sustainability-linked bonds,” says Lili Hocke, product manager, sustainable finance opinion services at Sustainalytics, a provider of ESG research and ratings for investors. “The green bond market has developed a lot over the last decade, but there are still signs that, in some parts of the market, the issuing of a green bonds doesn’t necessarily mean that it will lead to a reduction in carbon emissions.”
In January, reports surfaced about institutional investors divesting green bonds issued by the State Bank of India after it came to light that the lender intended to use some of the proceeds to finance the Adani Carmichael coal mine in Australia – a project that is estimated to generate 4.7 billion tonnes of greenhouse gas emissions over its lifetime. For some, the story raised questions around how serious financial institutions are about sustainable financing, and the need for more data to shape portfolio management.
“I don’t think greenwashing will ever be avoided fully,” says Georg Kell, chairman of Arabesque, a technology company that uses AI and big data to assess sustainability performance relevant for investment analysis and decision making. “The good news is that ESG data can increasingly be benchmarked against actual performance and thereby minimise the risk of investors being tricked.”
“We need to use technology to drive radical transparency to ensure coherence.”
The ESG data market is thriving, with an expected annual growth rate of 20 percent for ESG data and 35 percent for ESG indices, while the overall market could approach $1bn in 2021. Data providers like Sustainalytics and Arabesque are developing a range of ESG products that include everything from raw data to aggregated scores and second-party opinions of green bond issuers frameworks to ensure financial instruments are in line with market expectations and industry best practices.
“Bond issuers and fund managers need to be clear with their investors about whether the fund is doing positive or negative screening,” says Sam Robinson, deputy treasurer at Hitachi Capital UK, a leading provider of financial solutions for retail, motor, business and consumers. “Investors need to take a holistic view of the companies and projects they invest in, rather than simply looking at a green bond or ESG fund as hitting the UN’s Sustainable Development Goals (SDG) to avoid sustainable financing becoming just a box ticking exercise.”
This rising trend resulted in Morningstar acquiring Sustainalytics in April 2020, with the Chicago-based firm’s CEO acknowledging that modern investors in public and private markets are demanding ESG data, research, ratings, and solutions to make informed, meaningful investment decisions.
In turn, as socially responsible investing grows increasingly important to investors and AI-driven data analysis empowers them to effectively assess the “greenness” of various sustainable financing options it is prompting businesses to bolster their ESG reporting to provide tangible data or risk losing access to cheaper funding.
“Previously in our ESG reports we had talked a lot about sustainability initiatives, but I think investors really want to see that stuff quantified,” says Robinson. “What investors really want to see is how many ‘green’ vehicles we are financing? How much CO2 is your EV/ hybrid fleet or ESG project saving per year?
“A key point that investors want to see in corporate ESG reports is targets and a clear roadmap to track and ensure a company hits those targets.”