Green bond issuance grows over 200x in the last decade

The green bond market is expanding rapidly. Global green bond issuance has grown over 200-fold in the last decade, from $2.3 billion in 2012 to $511.5 billion in 2021. In that period, these bonds accounted for over 93% of total green finance globally.

Green bonds exclusively fund projects with positive environmental impacts. The first green bond was issued in 2007 by the European Investment Bank, which used proceeds for renewable energy and energy efficiency projects. What began as a slow-growing market has been expanding exponentially in recent years – and nearly doubling from 2020 to 2021 alone. The rapid growth of green bond issuance underscores the ever-increasing pressure to achieve climate goals and realize a net-zero economy.

Beyond environmental stewardship, companies may benefit financially and reputationally in a number of ways from issuing green bonds:

  • “The greenium”: This concept refers to the premium of a green bond. Borrowers of green bonds are able to pay lower interest rates than those of conventional bonds. While the spread between green and traditional bonds is small – up to 11 basis points – it is significant enough for CFOs to keep an eye on as they consider their financial strategies.

  • Investor base diversification: Issuers of green bonds attract new investors. Companies issuing these types of bonds have seen an increase in the share of long-term and green investors by 21% and 75%, respectively.

  • Stock price increase: Studies have found a positive stock price reaction around the announcements of green bond issuance. The stock price increase is particularly strong for issuers with green bonds that have been certified by independent third parties.

  • Higher return on investment: Companies issuing green bonds benefit from higher financial performance. Borrowers see an improvement in the return on assets (ROA) – a measure of profitability – by nearly six percent in the long run.

  • Enhanced environmental performance: Green bond issuers show improved environmental outcomes. They tend to have lower emissions, more green innovations, and better environmental scores, all enhancing company reputation.

Nevertheless, the rapid growth of the green bond market and its numerous benefits to issuers has introduced problems for regulators and investors. Concerns rise over greenwashing: in this case, a phenomenon in which green bond issuers make exaggerated environmental claims in order to secure funding from investors. A lack of standardization around what constitutes a green bond has contributed to a lack of credibility and consistency. Furthermore, despite the acceleration of this market, green bond growth is still insufficient. In order to achieve a net zero economy by 2050, green bond issuance must reach $5 trillion annually by 2025.

Despite these concerns, the green bond market has a promising future. New standards aim to tackle issues of greenwashing; for instance, proposals for the EU Green Bond Standard (EU GBS) would increase transparency of the green bond market. Additionally, S&P Global Ratings estimates that annual sustainable bonds (including green bonds) will surpass $1.5 trillion before 2023.

Although green bonds make up a small portion (1.7% from 2012–2021) of the total bond market, issuance continues to rise exponentially. The green bond market is a new yet promising space. Companies are increasingly recognizing the environmental, financial, and reputational benefits of green bond market participation. Financial leaders should pay particular attention to this developing market and take advantage of the opportunities that lie ahead. Green bonds are a key ingredient to meeting global sustainability goals and will only become more significant to the overall bond market.

Climate action demands skilled financial leadership in a rapidly evolving marketplace. If you’d like to learn more about how we’re helping CFOs and other financial leaders navigate the transition to a low-carbon economy, or if you’d like to participate in our research, contact us at info@theclimateboard.com.

Only 6% of board members from Fortune 100 companies have climate-relevant sustainability credentials

Early last year, the NYU Stern School of Business found that of the 1188 board members of Fortune 100 companies, only 29% had any ESG credentials (e.g. experience with human rights issues, ethics, cybersecurity, climate, or water issues), and most of that expertise was in social issues. Only 6% of board members had credentials related to environmental sustainability. The Stern researchers judged that only five of the 1188 board members had relevant climate experience. Combined with earlier research showing that only 10% of boards from the top 475 companies in the Fortune 2000 reviewed sustainability issues at their meetings, these findings paint a rather dismal picture of underpowered governance on climate issues.

Good boards feature a diversity of experience and perspective, and it’s not necessary that all members, or even a majority, be experts in any particular field. But it is generally helpful for boards to be well-attuned to the risks and opportunities their company faces. As my colleague Jacqueline Kessler wrote last week, climate risk and climate action are material factors that clear majorities of investors and insurers consider. As companies face mounting pressure to set emissions reductions targets, outline climate action plans, and show commitment on ESG issues, leaders must know which issues are material, how to respond strategically, and how to capture additional value from their actions. When directors lack knowledge of ESG issues and aren’t regularly reviewing the ESG plans of the companies they’re meant to oversee, boards will only hinder successful ESG management, and they will be far off from guiding strategic ESG action.

What do we do with this knowledge now? Considering – even prioritizing – ESG expertise during nomination can help strengthen top-down leadership on these issues over time, but there are also steps available to strengthen current directors’ responsibility for, awareness of, and emphasis on climate and ESG issues. Given the experience gap described above, education can go a long way. The Climate Board is proud to have helped its members’ boards to understand everything from the basics of climate science to industry-specific financial imperatives for action.

Corporate governance practices and policies also play a key role. In our work on effective ESG governance practices, The Climate Board examined how different ESG-forward companies structure their board-level review and oversight of ESG risks and strategy. Executive ESG steering committees, formalized champions for sustainability at the board level and C-suite, regular reporting through the Sustainability team to the top of the organization, and sustainability-linked compensation are all effective tools. Our research showed that ESG governance practices don’t have to be one-size-fits-all, but there are some common elements of success. The boards of companies we profiled were active participants in their ESG action plans, and accountability for climate and ESG plans ran through successful organizations at every level.

No matter what your company’s path to a climate-conscious board of directors looks like, be sure you’re on one.

Is your board pulling its weight on sustainability, or sitting on the sidelines? Are you a director who wants to learn more about how climate action fits in with core strategy? Or maybe you’re one of the lucky few leveraging your climate experience and expertise from the boardroom. No matter which, we’d love to hear your perspective. Click here to get in touch with our research team.

87% of investors consider ESG when making investment decisions

On March 23, global investment manager Nuveen released the results of its second annual EQuilibrium survey, uncovering the drivers of investor behavior. The 2022 study, which polled 800 global investors and consultants, reveals that climate change and its market consequences are already compelling asset owners to reexamine their traditional investment approaches.

Among the key findings: a vast majority of asset owners (87%) currently weigh environment, social, and governance (ESG) factors into their investment decisions or plan to do so within the next year. Within ESG, climate change and its effects are especially important in investors’ eyes:

  • 71% of institutional investors believe that climate risk is investment risk.

  • 79% believe the transition to a low carbon economy is inevitable, and even more (86%) believe the transition presents opportunities.

  • Climate risk was the second most cited trend shaping institutional portfolios over the next five years; only technological change ranked higher (by 1% of respondents).

  • 90% of insurance companies—a sector particularly adept at the identification and quantification of risk—address climate risk in their portfolios today or plan to do so within two years.

Put simply, investors understand that ESG risks, and climate risks in particular, are real and material. They also understand that companies that take action to address those risks are better investments. According to the OECD, companies with strong ESG practices may see enhanced revenue, corporate reputation, competitive positioning, and supply chain reliability, among other benefits. A majority of ESG investors believe that those investments are actually “safe havens” that retain value or even appreciate during downturns.

As investor attention grows, the pressure on companies to, at the very least, disclose, and ideally to improve ESG performance mounts as well. Importantly, investor pressure is additive to existing motivations. Companies must recognize that the benefits of meaningful climate action are growing, and they should recalibrate their strategies in light of investor priorities.

The Climate Board understands that climate action is sound strategy, but one that requires skilled financial leadership. If you’d like to learn more about how we’re helping CFOs and other financial leaders navigate the transition to a low-carbon economy, or if you’d like to participate in our research, contact us at info@theclimateboard.com.

70% of voters support government intervention on climate

A Morning Consult survey published earlier this year and commissioned by the Environmental Defense Fund (EDF) found that 70% of voters, including 88% of Democrats and 54% of Republicans, believe it is important for the federal government to use policy measures such as tax incentives and regulations to accelerate the adoption of technologies that reduce greenhouse gas (GHG) emissions. Even more believe the government should invest in such technologies.

That a majority of both parties (not to mention 65% of independents) support government intervention for the sake of climate action stands in contrast to this week’s climate-related headlines. On Monday, the Securities and Exchange Commission (SEC) released its highly anticipated proposal to mandate climate risk and emissions disclosures. The only vote in opposition came from the SEC’s only Republican commissioner, Hester Peirce, who after voting no turned off her camera in symbolic protest, citing, tongue in cheek, her desire to reduce her own carbon footprint. Early commentary has followed the same partisan patterns. Allies of President Biden hailed the move as an important step forward, though some climate activists are disappointed that the rule does not go even further to mandate disclosures of Scope 3 emissions. Meanwhile, Republican party leaders have already expressed their disapproval, and the US Chamber of Commerce has stated its intent to fight what it calls “overly prescriptive” mandates to disclose information that is, in its view, “largely immaterial”. It is a safe bet that the battle lines will remain clear through the comment period and beyond. Most observers expect a mix of lobbying and legal action intended to weaken or delay the rule—especially in view of the prospect that a future Republican administration might take a decidedly different tack.

But Morning Consult and EDF’s findings should give pause to those who assume that momentum toward climate action will last only as long as Democratic governance. It is becoming clear to many stakeholders of all political stripes that the risks of inaction are too great to ignore. 90% of companies in the S&P 500 already publish sustainability and corporate social responsibility (CSR) reports, and announcements of new sustainability commitments and emissions reductions targets seem to come daily. These moves are responsive to investor and market demands, which in turn are driven by consumer preference and the objective truth of rising physical risk. More and more businesses, including our members here at The Climate Board, are planning for a competitive marketplace where climate-conscious strategies are absolutely required. Because the need for climate action will not subside with political change, companies setting emissions reductions targets and developing sustainability plans should be doing so with serious intent to deliver on those goals.

Sources:

https://www.reuters.com/legal/litigation/us-sec-set-unveil-landmark-climate-change-disclosure-rule-2022-03-21/

http://blogs.edf.org/climate411/2022/03/16/as-congress-makes-big-budget-decisions-new-polling-shows-bipartisan-support-for-climate-innovation-investment

https://fortune.com/2021/04/22/corporate-america-net-zero-pledges-bofa-reports-earth-day-sp500/

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