Surveying the ESG terrain for capital markets
- Finance has an important role to play in improving sustainability, yet there is typically a lack of public data to observe the activities of capital market participants collectively.
- The HSBC 2021 Sustainable Financing and Investing Survey reveals over half of companies believe their businesses are already being affected by climate change.
- Investors and companies are increasingly recognising the relationship of ESG issues with returns and risk.
- The main pressure lies with issuers to make key changes to promote positive ESG outcomes.
August’s IPCC report was a loud reminder on the physical reality of climate change. But not only have the physical costs started to show, the economic price has too. Since 2000, according to a recent Stanford University study, warming has already cost both America and Europe at least $4 trillion in lost output, and tropical countries are at least five per cent poorer than they would have been otherwise. Finance has an important role to play in improving sustainability. Yet there’s typically a lack of public data to observe the activities of capital market participants collectively. However, the HSBC 2021 Sustainable Financing and Investing Survey, provides unique, on-the-ground insights through measuring ESG sentiments at more than two thousand companies and investors.
Figure 1. Percentage of issuers who believe climate change is already affecting their business or activities
Source: HSBC Sustainable Finance and Investing Survey 2021
The survey reveals that company activities are already reflecting the actualities of climate change – over half of companies believe their businesses are being affected by this. The response (shown in Figure 1) was particularly high for the Americas and Asia Pacific at 70 per cent and 64 per cent, respectively. As expected, sectors including oil, gas coal and chemicals as well as metals and mining were amongst the most affected. But with telecoms releasing a level of global carbon emissions not much lower than the aviation industry (1.4 per cent compared to two per cent, according to 2018 Ericsson data), this industry was also ranked as one the most affected sectors.
Indeed, two-thirds of investors agree that they’ve become more aware of the urgency of climate change, as well as 70 per cent of issuers. There are many motivations behind this increased focus on ESG issues in the past year, but coronavirus has been a key driver. Three-quarters of investors cite the pandemic as a reason for increased attention, with this being universally true across regions, industries and different types of investors.
Figure 2. Investors and issuers: why does your organisation care about social and environmental issues?
Source: HSBC Sustainable Finance and Investing Survey 2021
In addition to this, investors and companies are increasingly recognising the relationship of social and environmental issues with returns and risk, which has spurred further attention on sustainable investing. Back in 2019, financial reasons were ranked fifth, but it is now the second highest reason, with the percentage for respondents (displayed in Figure 2) at just over 50 per cent. This is especially the case in sectors such as transport, information technology, metals and mining, banking, and insurance, which all ranked higher than the average. In fact, returns and risk are an even more important driver when it comes to larger companies – two thirds of the largest issuers of care about ESG for this reason compared with a third of the smallest issuers.
Concerns and acknowledgements of the effects of climate change are important, but the main need is action. Though both issuers and investors note the importance of change with 90 per cent of investors placing importance on investing in companies that are preparing for the effects of client change, 40 per cent of investors still feel it’s not their organisation’s role to pay attention to environmental and social issues. This adds more pressure on issuers to make key changes. Almost 90 per cent of issuers surveyed said they expect to change their business model and capital allocation towards activities that promote positive ESG outcomes in the next two years.
In order to do this and meet further sustainability goals, 40 per cent of companies say they need a lot of financial help, especially within emerging markets – that equals a whopping great investment opportunity.
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