Impact Investing Conference

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Sustainable Finance is Going Mainstream: Here’s How You Need to be Prepared for Investor-Led Change JD SupraSustainable Finance is Going Mainstream: Here’s How You Need to be Prepared for Investor-Led Change JD SupraSustainable Finance is Going Mainstream: Here’s How You Need to be Prepared for Investor-Led Change JD Supra

Impact Investing Forum 2024

London. April 24-25, 2023.

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Sometimes it can be difficult to keep track of what’s happening in “green investing”, as there have been increasing numbers of announcements and initiatives regarding sustainable finance and environmental, social and governance (ESG). The G7 Summit in June was the latest. Leaders pledged to “embed[ding]] climate change and biodiversity losses considerations into economics and financial decision-making,” and also stressed the need to “green global financial system so financial decisions take climate considerations in account.” This rhetoric is being supported by concrete actions. The European Commission presented an ambitious strategy in July 2021 to increase the flow of money towards financing the transition to a sustainable economy. Asset managers are removing companies that don’t meet their sustainability criteria. Central banks have also included climate change risks in central banking discussions. BloombergNEF (BNEF) data shows that sustainable debt has now exceeded $3 trillion borrowed for ESG purposes. According to Bank of America research, more than 17 percent of all June bonds were labeled as having some flavor of sustainable, social or green. This is not just a top-down effort by policymakers and actors such as corporates and financial institutions – which can lead to one to doubt or believe that it will have any real-world, immediate impact. Investors are also driving the effort – and the results are more impressive than people initially thought. Bloomberg Green reports that almost all major activities in sustainability are above last year’s trend line: Financial markets are issuing more sustainable bonds and investors are investing more money in ESG-themed exchange traded funds. Another outperformer is the global sustainable bond market. In just six months, ESG-related bonds have been issued more than any other year. While the sector is still a small part of the overall bond market it is rapidly growing. Sovereign investors and other investors are required to account for a percentage of their funds going towards green bonds. How can you engage with this? There are three steps organizations should take to engage with this issue. Businesses that plan to issue green bonds, for example, should work closely with their internal departments to develop an ESG policy. This will allow them to clearly communicate their position to all stakeholders without having to greenwash their strategy. Failure to do so can lead to reputational and enforcement risks in certain situations. Understanding the ESG goals and sensibilities of your targeted investors is crucial if you want to attract investors who are committed to the long-term vision and interests of the company. If you’re trying to attract investors who are interested in carbon emission reductions and know that their fund is looking for them, it makes sense to include your carbon emission reduction strategy as part of your debt issuance. Transparency, reporting, and verification. If possible, ensure that you have the necessary internal reporting programs and external verification procedures in place. Share this information with your stakeholders. This helps prepare a company to meet the highest investor sensitivity. This is not going to be an easy task. The taxonomy for sustainability, or the rules of the road, is a confusing alphabet soup of acronyms as well as developing standards (TCFD, etc.). Part of the reason this confusion exists is that investors, asset managers, as well as issuers, have yet to agree on a common definition of ESG. However, there is progress. Five independent standard-setters announced a year ago that they would collaborate to create a comprehensive corporate ESG reporting program. European rules were implemented earlier this year to require financial firms and investors to disclose whether they have considered sustainability risks and how they are addressing adverse effects. The IFRS Foundation is expected to launch a global Sustainability Standards Board in time for the UN’s COP26 summit. It is important to remember that there are a variety of standards available. We have US GAAP accounting standards and IFRS accounting standards for auditing. ESG criteria are being used more by investors to determine whether they are involved or not in a deal. This will only increase demand. Are you ready? First published on September 27, 2021

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ESG Investing Conference