In recent years, the money invested in Environmental, Social and Governance (ESG) funds has increased exponentially. According to Reuters, a record $649 billion poured into ESG-focused funds worldwide (through Nov. 30, 2021), an increase of ~20% from 2020.
As banks, investors, boards, and equity holders pivot towards ESG, companies are, in turn, increasing their focus on best practice in the sustainable debt markets. Increasingly reliable data and more sophisticated analytics tools are helping to fuel this trend as financiers step up their benchmarking activities in the bond and loan markets. With new challenges and opportunities in sustainable finance occurring because of commitments and pledges from COP26, lenders and investors from major financial institutions will play a pivotal role.
Recently, Vinson & Elkins lawyers, Noel Hughes and Caitlin Snelson, joined Tony Hay (Joint Managing Director, Responsible Investor) and industry insiders Michaela Seimen (Executive Director, Sustainable Debt Strategist, UBS) and Will Prentis (Investment Analyst, Wellington Management) for a discussion on the current landscape of the green debt market and their expectations going forward. The conversation included real time, anecdotal observations – highly useful and informative for all market participants trying to navigate this rapidly evolving and growing market.
Five trends the panelists are expecting:
- Spurred on by the current Administration and attitudinal changes from the pandemic, investors are thinking about their environment more than ever before and want this reflected in the entire value chain of their lives, including where they invest their capital.
- Although Europe led the charge in terms of volume and standardization, we expect that in two to three years’ time (or less) the US green market will outperform the European market significantly.
- Although the demand for green debt is outpacing supply, investors are still skeptical as to whether these products are driving real change or is this just “green washing.”
- Second-party opinions and ESG evaluations from third-party providers are stepping in to fill the gap where the regulatory framework has fallen short to address the “greenwashing” concerns.
- Over the next 12-18 months, we expect to see more growth, particularly in the Asian market, more regulation/standardization, more innovation around available products, especially around sustainability-linked products and more certification/verification programs to ensure KPIs are driving real change.