From a business management perspective, the idea of incorporating ESG standards is strongly embedded.
In a world increasingly aware of the need to nurture the environment and protect social rights, the role of corporations as drivers of the transition towards a more committed and sustainable society and economy is essential.
byAnthony Diaz-PerezAnd the Ana M. Escribano LopezAnd the Rachel Lopez Garcia
From a business management perspective, the idea is firmly entrenched that integrating environmental, social and governance (ESG,ENVIRONMENT, SOCIAL AND GOVERNANCE ) to the company’s strategy to which he contributesLong-term appreciation
. Added to this is the increasing demand for sustainable financial assets by investors. according to himSpain Forum for Sustainable and Responsible Investment SpainSIF
At the end of 2021, the amount allocated to sustainable investment far exceeded the amount allocated to conventional investment, with nearly 350,000 million euros managed.
In practice, this translates into an increase in investor potential and greater financing facilities for those companies operating under the ESG umbrella.
How do you get the ESG distinction?
- In other words, how can they attract investors who incorporate ESG criteria into their investment decisions? In general, we can distinguish two alternatives:
- That the company obtain an ESG label.
That the company issues a financing instrument under the ESG mark.
Let’s look at the first alternative.
Any company interested in the benefits of obtaining an ESG label. Both companies that calculate ESG indices and sustainable investment fund managers rate companies based on the degree of compliance with the ESG criteria, which determines their inclusion in them.
Thus, the inclusion in the sustainability index or ESG score given by fund managers serves as a guide for those seeking to invest in assets from leading companies in the field of sustainability. In recent decades, a large number of stock indices and sustainable investment funds have proliferated, such as index group good (which includes a file FTSE4Good IBEX for Spanish companies), or the leading indices of Standard & Poors (includingS&P 500 ESG Index ) and indicatorsDJSI’s world
. Regarding the issuance of instruments called ESG (such as bonds and bonds), activity continues its upward trend, especially since 2020. According to the latest developmentsOfiso Annual Report
In 2021, 28,548 million euros were deposited in Spain in green, social and sustainable bonds, almost double what it was in 2020. Worldwide, this figure reached 902,000 million euros, up 66.4% from 2020.
These numbers demonstrate the growing interest in sustainable finance from corporates, from conscious retail investors and, above all, from large fund managers committed to ESG instruments.
Different types of sustainable bonds
Green bonds are the best known type of bond associated with sustainability or respect for ESG standards. Green Bond exclusively finances projects that promote environmental sustainability. There are many international classifications of green projects according to their objectives: mitigation and adaptation to climate change, sustainable use of water, transition to a circular economy, conservation of natural resources, pollution control and prevention, and protection of biodiversity. There is, for example, a file Classification of sustainable activities for Europe
Published by the Bank of Spain. Despite high growth in recent years, the weight of green bonds in sustainable financing is declining, and in 2021 they account for only half of the total issuance, according to the Climate Bond Initiative
(up to the third trimester).The reason for this reduction is the emergence of social bonds, sustainable bonds and transition bonds, and the emergence, at the end of 2020, bonds linked to sustainability (Sustainability related bonds
Operating social bonds and sustainable bonds is like working green bonds. These are bonds that finance eligible social projects or a group of eligible green and social projects, respectively. Transitional bonds are issued by companies that find it difficult to meet the criteria for issuing green bonds. They are big sector companiesbrouwn
: Industries with high carbon emissions, such as gas and chemical production.
These bonds enable the financing of transition plans towards sustainable environmental and environmental goals, energy savings and a commitment to reduce greenhouse gas emissions.Finally, the Sustainability-Linked Bond (SLB )
It is not linked to any specific green or social project, but is linked to the issuer’s commitment to achieving specific ESG objectives within a specified period. If the goal is not reached, the issuer is penalized by increasing the amount of coupon to be paid to the investor.
unsustainable sustainability The corporate commitment to operating under ESGs is commendable, but in addition to this, the social pressure and financial benefits of operating under the name of Continuous Encourage the emergence of fraudulent behaviour. It is the phenomenon of environmental bleaching orgreen wash
. Recent cases like Exxon Mobile in the United States or Volkswagen
In Europe it has had a major impact on public opinion and has raised the specter of environmental laundering over sustainable finance.
In terms of sustainable financing, environmental laundering practices affect both the ESG rating of companies and the issuance of sustainable debt. published investigation Bloomberg reveals that Reviews or the categories you useBlack stone
, director of the world’s largest ESG fund, to justify including a company in that portfolio that has nothing to do with its environmental and social impact. Only one of the 155 ESGs in the S&P500 Index indicated an actual reduction in carbon emissions. In this sense, there are more and more voices that assert that the problem of environmental washing is partly related toThe correctness of the term ESG
. When it comes to classifying a company as an ESG, there are three overlapping areas (Environmental, Social and Good Governance), and measuring them together can be an obstacle in itself to promoting sustainable financing. Regarding sustainable debt, reports like the one before Black stone
They concluded that green bonds are a dangerous placebo to attract investment. Most issuers have some qualifying green initiative that allows them to issue these bonds without having to change the company’s overall plans. But nothing prevents them from doing categorically non-green activities with their other sources of funding.
More and better organization
Misrepresentation or exaggeration of ESG practices not only carries reputational risks, and harms consumer and investor confidence, but also carries legal risks. The level of scrutiny being applied to ESG’s assets is increasing by regulators and individual and institutional investors. International regulators are working to develop sustainability reporting standards that focus on protecting investors from the risks of environmental laundering. Among these measures EU classification
Adopted in 2021 on businesses that can be classified as climate-friendly.
European and North American initiatives on developing standards for information disclosure and transparency on sustainability, or efforts to develop common international standards may also be cited. In addition, there is the voluntary standard for European green bonds, as well as standards for new types of green bonds and environmental, social and institutional governance.
The regulations are expected to contribute to controlling environmental laundering in favor of rigorous and reliable sustainable financing. to Anthony Diaz-Perez He is University Professor, Department of Financial Economics, Department of Economic Analysis and Finance, University of Castilla-La Mancha; Ana M. Escribano Lopez She is Temporary Contracting Professor, District Financial Economics, Department of Economic Analysis and Finance, University of Castilla-La Mancha; And the
Rachel Lopez Garcia
Contracting Professor PhD, Department of Economic Analysis and Finance, University of Castilla-La Mancha.