09/01/20

SUSTAINABLE FINANCE: Affect of ESG on 2020 Landscape.

As published on esg.theasset.com, Thursday January 9, 2020.

THE influence of environmental, social, and governance (ESG) on financing decisions is expected to grow over time as social and regulatory pressures push more banks and investors to take ESG considerations into account.

About 64% of 182 banks that responded to Fitch Ratings global banks’ ESG risk management survey said they already incorporate ESG considerations into their risk organization always or most of the time.

“We believe investor and regulatory pressure will encourage banks to place further emphasis on ESG, particularly in areas such as climate change risk through channels like the Task Force on Climate related Financial Disclosures (TCFD) launched by the Financial Stability Board,” says Mervyn Tang, head of ESG Research, Sustainable Finance and Andrew Steel, managing director, Sustainable Finance at Fitch Ratings in a report entitled "ESG Credit Trends 2020."

“It is mainly the largest global systemically important banks that are carrying out forward-looking climate change scenario analysis, but central bank interest is also increasing and many more banks have reported that they are interested or are looking into it,” according to Tang and Steel.

Borrowers that banks are less willing to lend to for ESG reasons may also be facing pressure in capital markets, as fixed income investors pay greater attention to ESG, though at different speeds regionally.

The International Monetary Fund (IMF) has calculated that the number of funds with an explicit ESG mandate has increased to 1,931 at September 2019, up from 913 in 2010. Equity ESG Funds more than triple the number of fixed income ESG funds, although the latter are growing quickly.

The IMF estimates the total assets under management of ESG-Iisted funds to be US$856 billion, up from US$352 billion in 2010. The conversion to explicit ESG mandates is happening even in sectors where there previously had been less penetration, such as money market funds and CLOs. Even without explicit ESG mandates, more asset owners and managers are integrating ESG considerations into their investment framework.