martedì 17 aprile 2018

Written by Giulia Galli 

Everybody knows what sustainability is or what finance is, but less people know that there is a link between the two, and this link is called sustainable investing or SRI (socially responsible investing). 
Let’s start from the beginning: ethical finance. This subsector of finance is characterized by the use of both economical and moral criteria to choose investments. As far as the moral criteria are concerned, they can be both religious (as for Islamic Finance) and laic. What we are interested in are the sustainable criteria in particular, that lead to the definition of sustainable finance.

Different phenomena are entangled in this sector; to give some examples, microcredit, that gives funding to developing countries, in small amounts and at low interest rates; Social Banks, which commercialize products giving priority to moral objectives; impact investing, aimed at allocating capital to boost social projects.

There are different strategies through which sustainable finance is pursued. Let’s get through the main ones. Negative screening is the exclusion of companies that do not meet ethical criteria. At the opposite side, there is positive screening, that is the inclusion of companies that respect predefined requirements. A more technical mixture of the two is norm-based screening, according to which firms have to manage their business respecting defined and formal norms, based on the right moral behavior. Already mentioned above, impact investing is focused on environmental and social problems, and especially community investing relates to the development of disregarded communities. Sustainable investing relates to the choice of firms that belong to green sectors such as renewable energies. A little bit more difficult to detect is shareholder action, thanks to which the main stakeholders of a company, namely stockholders, try to intervene in the firm’s decisions in order to make them greener and socially acceptable. At the bottom of the list there is the more diffused one, ESG integration, based on ESG criteria.

What are ESG criteria? They define the benchmarks a company should reach in order to be included in the portfolio of what is called an ethical fund, that is a fund pursuing moral objectives thanks to the above-mentioned strategies. The acronym ESG stands for Environment, Society, Governance. In order to clarify the differences, let’s make some examples of the principles included in each field. Environment analyzes carbon emissions, renewable energies use, animal protection policies. Society includes concerns about suppliers, employees, community or women. Governance requires transparent accounting standards, fight against corruption and protection against conflicts of interests.

The main focus of this article is environment. A first example in this field is the issuance of green bonds. Green bonds are structured as traditional bonds, meaning that the investor provides funding in exchange of interest payments and a principal repayment, amortized or bullet. The difference is that proceeds are used to finance projects that have positive environmental and climate benefits. Generally, these bonds are asset baked, meaning that the entire balance sheet of the issuer acts as a warranty to the payments. There are different types of green bonds: green "use of proceeds" bond, green "use of proceeds" revenue bond/ABS, green project bond, green securitized bond, covered bond and other bonds that all have a common feature: they care for environment protection.

Obviously, there are costs associated with the issuance of this type of securities. The issuer must track and report the use of proceeds, as investors are choosing to allocate their money in a specific way and they want to be sure of the success of the project. Why should investors choose to do so? First of all, there are evident moral considerations, as the concern for climate change and environmental protection is an ethical principle widely spread across people’s minds. Second, there is a strong business case to go green, as it is proved that the big majority of responsible investments allow to make a higher profit by looking at long term benefits instead of short period ephemeral gains. The concerns about high costs associated with this kind of investment are therefore fully balanced by the possibility to make profits, both from a moral and from an economical point of view. These bonds allow the issuer to improve its reputation, to exploit economies of scope and to diversify investor base.

The green bond market was born in 2007 with the AAA-rated issuance from different institutions such as European Investment Bank and World Bank. After that also governments and corporations started to join the flow and ABS bonds were created. In 2014 a 37bn USD bond was issued and in 2017 issuance was almost 157bn USD, the so far accepted record. There are also stock exchanges that launched a dedicated section, such as the ones in Oslo, Stockholm, London, Mexico, Luxembourg, Italy, Shanghai, Taipei, Johannesburg and Japan. As it can be seen the development of the market is strong and the interest is growing, so let’s keep pace with financial evolution!
To make a concrete example of the current situation, Allianz GI vice-chair Elizabeth Corley estimates the UK impact investing market in its broader definition, which includes also green investments, is worth £150bn. Allianz managers seek to increase this market, recognizing its importance and economical potential. Prologis, the global real estate logistics company, launched at the beginning of March 2018 a €300mn green bond, which is the refinancing of an already existent bond. The company has developed a “green bond framework”, of which the March bond is a representative. Moody’s has rated the bond, providing the proof that there exists a green multiplier effect, that ensures the economic gains of this kind of securities, in excess with respect to traditional finance profits.

To sum up, we can say that the green bond market is pleasantly expanding, and the investors’ interest is growing. To ensure a correct development of the sector, concerned and informed investors are needed. The gain is twofold, giving the possibility to build a moral and economical realization, much bigger than what investors are used to. So the question is: what’s next? A first answer is that the next step is gathering information and trying to enter this fascinating market in order to improve as ethical people and as finance people. It is important to keep up with the financial world evolution, a world that must be pushed to grow in the correct way, and, people, it’s up to us to ensure this positive expansion!


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