Primary school in Madagascar. Photo: © Mohammad Al-Arief/World Bank
Growing concern over climate change and social issues are driving an unprecedented change in the way that money is invested today. According to a survey conducted by Morgan Stanley Institute for Sustainable Investing, eighty percent of individual investors, among them Millennials - the new generation of investors - are interested in investing their money not just for financial return, but also for positive social and/or environmental impact. Asset managers, pension funds, and other institutional investors are increasingly developing their capacities to serve this growing market.
Increased scrutiny on ESG risks
Green and other thematic bonds, which require issuers to disclose how bond proceeds are used and what the expected environmental and social impact of projects are, have played an important role in creating awareness and appetite in investors for higher transparency standards and more disclosure on sustainability-related issues.
The Sustainable Development Goals (SDGs) have also acted as catalysts by providing investors and other market participants with a framework to assess investments based on risk and contribution to society.
Moreover, asset owners such as pension funds are recognizing that environmental, social and governance (ESG) issues can have an influence on the risk-return profile of investment portfolios. They are increasingly using ESG information and developing ESG risk assessment methodologies and portfolio selection frameworks to enhance their credit risk analysis and make better informed investment decisions.
Credit rating agencies such as Fitch, Moody’s, and S&P Global Ratings are also making ESG factors more explicit in their credit assessment methodologies.
The focus on ESG is influencing the way sovereign issuers are engaging with investors. Ministries of finance and public debt managers are realizing the importance of incorporating ESG issues and progress on SDGs and Paris Agreement commitments into their investor relations functions.
Fostering dialogue between investors and issuers
The rising interest in this topic was evident at a roundtable organized by the World Bank Treasury in partnership with the Government Pension Investment Fund of Japan (GPIF) and APG, the Dutch pension fund, to promote dialogue between institutional investors and sovereign bond issuers on ESG risks and opportunities earlier this year. Seventeen institutional investors, including asset owners and asset managers from Asia, Europe and the US discussed their interest in broader proactive engagement with sovereign issuers, and shared approaches, perspectives and expectations with peers. Four sovereign issuers presented the ESG attributes of their government bond programs, national priorities and progress towards global commitments.
The discussions highlighted challenges for both issuers and investors. Issuers, especially those in the emerging markets, do not have a clear understanding of the ESG issues that are relevant for investors. Data availability is a major issue, as is the need to balance the higher costs and benefits of greater communication and reporting. Investors rely extensively on mandatory financial and non-financial reporting, external ESG metrics and specialized third-party assurance, but there is no shared understanding of key ESG issues at the sovereign level that can have material impact on the valuation of fixed income instruments. This is precisely an area where the World Bank can leverage its extensive experience and convening power.
Promoting sustainable capital markets
The World Bank Treasury has been at the forefront of building sustainable capital markets by offering investors fixed income securities with triple-A risk-adjusted returns, ESG risk mitigation opportunities and positive development impact. Treasury integrates ESG in its role as an asset owner for the World Bank’s post-retirement benefit plans.
Treasury also promotes the role thematic bonds (green/blue/social bonds) can play in aligning fixed income portfolios with climate and sustainability goals; advises governments on action plans to kick-start domestic sustainable capital markets; and helps regulators develop ESG guidelines and strategies.
As part of its work with ministries of finance on strengthening public debt management capacity, Treasury disseminates guidance on communication on ESG issues to debt managers and their investor relations teams.
In 2017, the World Bank Group (including the World Bank and IFC) formalized a partnership agreement with GPIF to promote strategies that include ESG criteria in investment decisions across different asset classes. This collaboration led to the launch of the report Incorporating Environmental, Social and Governance Factors into Fixed Income Investment and collaboration on various ESG-focused investor and issuer workshops.
Based on investor feedback, the World Bank is also developing an ESG data portal that provides a comprehensive and balanced picture of a country’s sustainability performance. The framework incorporates indicators relevant to all 17 SDGs.
Investor engagement with sovereign issuers on ESG issues is an emerging opportunity for enhanced communication between investors and issuers. The World Bank is working towards a greater understanding of the key metrics, data, and approaches. The objective of the Bank’s work in this area is to harness the power of the capital markets to promote sustainability.
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