Measuring the Results that Matter

There’s a movement afoot around the world. More than ever, people are taking a company’s environmental, social and governance (ESG) operations into account before investing. ESG is a familiar term, but let’s break it down to its basics:

• Environmental criteria explore a company’s impact on nature
• Social criteria examine how it manages relationships with every stakeholder in its purview
• Governance looks at an enterprise’s leadership as well as its treatment of employees, suppliers and shareholders

Today’s investors are increasingly linking a firm’s ESG initiatives to its bottom-line performance—a major shift to what’s termed sustainable finance. To earn the trust of those in the market for stocks, businesses have been upping their ESG game. This year, for example, H&M Group, a Swedish-based multinational clothing company, issued a EUR 500 million sustainability-linked bond with a maturity of 8.5 years.

Research shows that when enterprises like H&M align their sustainability targets to their financing, they earn credibility with internal stakeholders, the respect of their peers and the buy-in of their communities.

“Today’s successful bond issue is proof that the financial market also values our ambitious sustainability work, and we look forward to working together for a sustainable industry,” H&M CEO Helena Helmersson said when the announcement was made.

Firms issuing instruments that reflect such corporate purpose take their commitments seriously. An ING study of 100 institutional investors and 450 companies across seven sectors found that nearly three-quarters of the enterprises surveyed have introduced stringent internal ESG accountability metrics. But they’re embracing ESG policies for pragmatic reasons, too. Resiliency in the face of climate change or other disruptive global events is a true competitive advantage. Plus, by integrating the value of environmental elements into their corporate strategies, they’re getting a clearer picture of their financial profiles. That promotes big-picture planning.

As for those people drawn to sustainable finance, they tend to look at the return on investment in a non-traditional way. For many, it’s not just about revenue and profits. They broaden the definition to include the added economic, social and natural value a business—and their investment—contributes to society at large. This new approach to ROI, for example, appraises the state of the world’s stock of renewable and non-renewable natural resources—its “natural capital.” It assesses “ecosystem services”—services that nature provides. In general, a consensus is building that financial capital is not the only yardstick for success.

But here’s the thing. As the demand for green bonds escalates, issuers are benefitting, according to this green bond pricing study. It reports that in 2020, 26 out of 33 green bonds that qualified for the designation priced on or inside their yield curves and delivered a premium—a so-called “greenium”—that lowered their borrowing costs.

There’s additional proof that green initiatives reduce borrowing costs for issuers. A 2019 study of 1,500 green bonds issued by nations, agencies and very large corporations showed that in comparison to their non-green counterparts, they consistently producing ‘greeniums.’ And a 2020 study concluded that between January 2017 and April 2020, yield volatility in green bonds was lower than it was for traditional bonds. What’s more, according to the Harvard Business Review, stock prices increase after an issuer announces a green bond offering, especially for those green bonds certified by independent third parties. The report shows that there is a correlation between green bonds and a 2.4% increase in long-term value.

Another factor is at play, too. As ‘greeniums’ lower issuers’ borrowing costs, those savings are finding their way to investors in the form of dividends. They’re also reflected in lower operating costs for sustainable ETF funds. One more advantage is that income from many green bonds is often tax-exempt, giving investors a way to hold onto more of their money while doing good. That fact holds a definite appeal to issuers looking to attract millennials, who place a lot of stock in ESG credentials.

Clearly, a sea change in investing is underway. It’s affecting the economy as a whole—but it’s leading to sustainable growth.

Other Topics

Bonds ESG Fixed Income Investing

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