The trend and the worldwide regulation are supportive of demand for capital allocation towards more green and sustainable solutions.
On one hand, there are the texts to regulate sustainable investments. On the other hand, there are the various ESG regulations to regulate sustainability at corporate level. ESG investing no longer only concerns European companies and investors; it has become a global priority. Indeed, most of the key APAC markets (China, Hong Kong, Japan, South Korea, New Zealand or Singapore) have committed to ESG regulation. The coming year will give us more details on the implementation. The regulations refer not only to climate change but also strengthening the financial ecosystem for ESG investments.
In the USA, the new presidency could represent a pivotal year for the country in terms of climate change targets and ambitions. It will also be important to follow up the declaration of the US Federal Reserve to join the Network of Greening the Financial System (NGFS). This network of 75 central banks and regulatory authorities formally recognises climate change as a systemic financial risk. Since November 2020, the Fed, whose actions are followed by billions of investors, has included climate change as a financial stability risk in its semi-annual Financial Stability Report. Furthermore, the elections could be an important catalyst for sustainable finances in the US. Rumour has hit that the Biden-Harris Administration plans on mandating and standardising ESG disclosure by issuers. It might also modernise fiduciary duties to integrate ESG factors, and incorporate these into financial safety and soundness regulation.
Finally, let’s not forget about the Latin American continent. Although it is still lagging behind compared to other parts of the world, its developments in ESG regulation have been steadily progressing thanks to increasing interest from investors. Of note, Brazil might adopt mandatory reporting and disclosure standards similar to the TCFD recommendations. Smaller countries, like Mexico, Chile, Colombia or Peru are also expected to adopt ESG regulations. The question is rather whether they will develop their own national standards, or if they will adopt the global existing ones instead. The latter option could put us on the road towards universal standardisation.
GREATER TRACTION FOR GREEN AND SOCIAL LABELS IN 2021
We have been highlighting the record issuances of green bonds for several years. 2021 will not be an exception in this regard, though it will likely witness a diversification towards social and sustainable bonds as well. In Europe, we expect close to EUR 75-100 billion of labelled corporate bonds, compared to over EUR 50 billion in the first eleven months of 2020. The issuing sectors are likely to consist of consumer goods, health care and telecoms. These would present a welcome diversification to the current dominance of utilities and banks.
It is also worth noticing that the pandemic and racial tensions have led to a huge pick up in the social bond market, which grew tenfold since last year. The social bonds still represent only a minor part of labelled bonds (less than 30%). Still, following their 2020 pickup, they will become increasingly important.
Global decarbonisation is expected to require USD 150 trillion; there is no doubt that green bond issuance will not slow down. However, regulations regarding green bonds (and in particular reporting) will continue to strengthen transparency, climate-related key performance indicators and coverage of achieved targets.
THE PANDEMIC HITS THE SDG’S FINANCING GAP
The sanitary crisis has increased the financing needs for the sustainable development goals. In some cases, 2020 has suppressed years of recent progress. The needs were originally impressive: around USD 2,5 trillion per year. The impact of the COVID crisis and the subsequent lockdowns is estimated to have cost an additional USD 1 trillion in 2020. In parallel to these increasing needs, the financing sources decreased in 2020 (around USD 700 billion for external private resources).
