The explosive growth in demand for environmental, social and governance funds is a striking indication of the direction of travel among investors in global sustainable capital markets. At a one-day symposium co-hosted by OMFIF and DZ Bank, experts and financial leaders from across the industry met to discuss the future of sustainable finance.
‘Sustainable investment is turning mainstream,’ said Wing Chan, director of managing research practice for EMEA and Asia at Morningstar. According to Morningstar’s numbers, record inflows to over 4,000 funds with a sustainable objective and/or binding ESG criteria for their investment selection lifted their total assets to $1.65tn at the end of 2020, compared with $960bn a year earlier.
Inflows in Asia, said Chan, almost doubled the assets of ESG funds in the region to $43bn. The explosion of demand in Taiwan was especially notable, with 11 new fund launches (compared with just two in 2019) attracting inflows of $1.7bn.
Morningstar has identified almost 3,200 funds with $1.34tn under management in Europe, which continues to be the clear leader in the global market for ESG funds. Hortense Bioy, Morningstar’s global director of sustainability research, highlighted that ‘2020 was a year of broken records in Europe in terms of flows, assets and product development.’ A notable measure of this growth was that European ESG assets rose by 52% in 2020. According to Bioy, this was compared with a sluggish increase of 3% across the entire European fund universe.
These are encouraging developments, but the figures reinforce the position that demand for green assets is running ahead of supply. The green bond market’s share of global fixed income remains minuscule. According to the International Capital Market Association, as of August 2020 the total volume outstanding in the global bond market was just over $128tn.
The official size of the green bond market may be an unhelpful measure, suggested Heike Reichelt, head of investor relations and sustainable finance at the World Bank Treasury. She said that while labelled green bonds may still account for less than 1% of the international bond market, this understates the role that sustainable finance is now playing in financing the global economy. ‘We should focus on the forest rather than the trees,’ she said.
The global financial services industry and capital market is still in the formative stages of reinventing itself as a driver of change. Anne Simpson, managing investment director, board governance and sustainability at the California Public Employers’ Retirement System and member of OMFIF’s advisory council, emphasised the responsibility borne by the institutional investor community in steering the planet towards carbon neutrality.
As the largest public pension fund in the US, with $444bn in assets under management as of January 2021, CalPERs is already at the forefront of this movement. An example of this leadership is its support for Climate Action 100+, an investor-led project designed to push the world’s largest corporate greenhouse gas emitters to take decisive action on climate change. At the last count, said Simpson, investors with some $50tn of assets under management had signed up to the project.
Simpson, a member of the initiative’s global steering committee, explained that the movement was the product of recognition among institutional investors of the influence they exercise over the world’s main sources of pollution. She said that according to CalPERS’ calculations, of the 10,000 companies within its equity portfolio, about 100 are responsible for as much as 85% of harmful emissions. ‘Climate Action 100+ gives us an opportunity to work with our fellow fiduciaries to make sure we bring emissions down within this group of companies,’ Simpson told David Marsh, OMFIF’s chairman.
The investment management industry is becoming increasingly active as a gatekeeper monitoring the ESG credentials of the capital under its stewardship. Henry Chan, equities chief investment officer at BEA Union Investment, said that conventional long-only investment was still probably at the ‘bottom of the food chain’ in the sustainable finance movement. But he said that more institutional investors in Asia are quizzing their managers about the integration of sustainability and governance considerations in their investment processes.
Chan added that signs are emerging to suggest that regulatory pressure is having a discernible impact on corporate earnings. ‘This is now starting to affect fund flows and how investors look at valuation and risk premiums,’ he said.
Philip Moore is a freelance financial journalist. The quotes in this article are from panellists who took part in a sustainable finance event, co-hosted by OMFIF and DZ Bank.