ESG Investing – the rise of the social factor

By Elena Ilkova

The ESG – environmental, social and governance – agenda of investors, issuers and policymakers is rapidly becoming mainstream as the world grapples the effects of the Covid-19 pandemic.

And amid a new spirit of collaboration between the public and private sectors, there’s broad agreement that rebuilding the economy provides an opportunity to transform societies and to make systems resilient against future shocks.

In South Africa, it is expected that the sustainable financing market is likely to accelerate as capital allocation becomes increasingly based on integrating ESG considerations into fixed income investments.

The idea that good corporate citizenship makes good business sense has already been entrenched by the King Codes on Corporate Governance.

Increasing awareness of climate change has focused more attention on green issues since actions to mitigate climate change are urgent and environmental considerations (the E) have disproportionate influence – they exacerbate the social impact (the S) and need to be embedded in governance structures (the G).

Not surprisingly, the focus on green funding over the last five years has seen a significant increase in green debt, with issuance increasing 4.5x from 2015 to 2019. Green now accounts for 75% of the US$1,400bn outstanding sustainable debt securities. However, the issuance of sustainability-linked debt grew 11.4x, before the onset of the Covid-19 pandemic.

Publication of the Sustainability-Linked Loan Principles (SLLP) in 2019 by three loan markets associations, and in 2020 the International Capital Markets Association (ICMA) release of its Sustainability-Linked Bond Principles (SLBP), fuelled the pickup in global activity.

ESG assessments are also becoming influential as ESG ratings increasingly drive asset allocations, much as traditional credit ratings determine allocation in fixed income portfolios.

Unsurprisingly, health and well-being are the obvious investment sectors under the “social” theme.

Pandemic- specific issuance so far has been dominated by supra-nationals, such as the IFC, AfDB, EBRD and EIB with Guatemala opening the sovereign tally in April 2020 and, in January 2020, Ecuador becoming the first country to issue a sovereign social bond.

De-risking and simplifying supply chains are already a priority for many organisations while a change in consumption patterns is inevitable.

As economies and companies adapt, and economic recovery is partially driven by investment in infrastructure - such as in green energy, water and sewage, connectivity, and cyber security - there is little doubt that investor demand will encourage a growth in fixed income ESG products.

Ilkova is SA Investment Strategist at RMB



RMB is a leading African Corporate and Investment Bank.