“If they have labeled investments it’s easier for them to communicate to their stakeholders what they’re doing and why they’re doing it,” he said. “If it’s unlabeled, it’s going to be difficult to box it.”
Jacob Michaelsen, the head of sustainable finance advisory at Nordea Bank Abp, says green shares will function a bit like sustainability-linked bonds, whereby funds raised are channeled into general operations. That makes them less straightforward than green bonds, which fund specific projects.
The Nordic region’s biggest bank has also been thinking about how to label shares green “for a good while now” because companies are asking for it, Michaelsen said. But Nordea hasn’t yet settled on an approach. Most businesses pursue a variety of activities, so the challenge is figuring out “how do they go about saying they are green equity” in their entirety.
Debt Dominates
The ESG market has been dominated by fixed-income products since SEB underwrote the World Bank’s first green bond more than a decade ago. This year, ESG debt issuance may hit $1 trillion, according to Bloomberg Intelligence. Investors are also pouring money into ESG exchange-traded funds, with inflows climbing for a 49th straight week.
Meanwhile, regulatory scrutiny is growing. The U.S. Securities and Exchange Commission is looking at ESG-labeled ETFs now, and says it won’t tolerate weak documentation and inconsistent application of criteria.
Michaelsen at Nordea says ESG ratings by third parties or the European Union’s new taxonomy on sustainable activities may provide some guidance on how to go about identifying green companies and labeling their shares.
“It’s clearly something that we-- and I would suspect most of our peers--are spending more and more time on,” he said.
At SEB, Flensborg says banks will probably introduce a variety of different frameworks, as was the case with the green bond market. In time, standardization will follow, in part because of regulatory pressure.
“We will eventually need that,” he said. “But before you have that, you will need to create something.”
Goldman’s Goldstein says the broader political environment means demand for ESG assets is likely to pick up.
“If we look back at 2020, which was a pretty remarkable year for sustainable investing in ESG, all of that really happened with U.S. federal policy as a fairly pronounced headwind,” he said. Now, the U.S. “is a tailwind.”
This article was provided by Bloomberg News.