Ladies and gentlemen, take your seats for this afternoon’s infrastructure entertainment. We’ve a game for you to play – a real crowd-pleaser – one that’ll have you on the edge of your seats and excite your competitive spirits.
You have a card in front of you. Grab a pen as we pick the first of many “bon mots” of investment-based management speak and enforced good intentions. Cross them off as they’re called out.
When you have a full house of well-meaning terms being adopted by the increasingly-fluffy and ever-so-nice finance community, the first to shout “Bullsh*t Bingo” wins the prize.
Kindly excuse the flippancy, but as we weave our ways through this evolutionary shift in social and financial investments, our daily lexicon is expanding to encompass an evolving thesaurus of terms and clichés that started with “Equator Principles”.
This phrase – the grandparent of ESG – was first coined in June 2003 and refers to the risk management framework adopted by many financial institutions to determine, assess and manage environmental and social risk in project finance.
Its ambitions were laudable, but most folk agree that it failed to embed itself into the market DNA and while (according to the IFC) more than 90 banks have since then signed up to Equator Principles, its impact has been fairly muted – sorely impacted by too much of a leaning towards emerging markets.
Fast forward to the current market where we are fed a daily diet of news on climate change and social awareness, Equator Principles have been largely side-lined (some are cruel enough to say forgotten) in favour of ESG – environmental social governance.
Love it or hate it, ESG is very much a thing… and it’s here to stay.
The infrastructure community is taking it seriously which – at the risk of sounding like a Lefty preacher – is no terrible thing. And everyone wants to carve out a piece of the socially-responsible pie.
As we look around, the ratings agencies are scrabbling to take a leading position on this front while desperately trying not to shoot themselves in the foot and make it too difficult for people to close deals.
Never ones to hold back on jumping on financial issue of the day, both S&P and Moody’s are staging conferences on the subject in the coming month.
Meanwhile a growing number of organisations/chancers are looking to capitalise on this opportunity, seeking to shoulder their way into the lucrative role of Devil’s Advocate on all things responsible.
However, there are scores of organisations out there with a variety of methodologies on which to judge the market, and we are swiftly moving away from an environment of box ticking towards one that has distinctly sharper teeth – making decisions from the outset binary.
Environmental, social… governance
The first two elements of ESG are fairly well understood (though interpreted in different ways by every single organisation under the sun), and the G is only really relevant to emerging markets.
Speaking to folk in the market this week, most are in agreement that the environmental element of ESG is where its true impact lies “in the continuing rise of the Greta Thunberg age”, as one source puts it.
And this goes far beyond the delivery of yet another offshore wind farm in the North Sea (so soon to be so blasé), a solar park in Australia (don’t forget the now inevitable storage), or geothermal in the Netherlands (if you’re brave enough).
Nowadays you can’t log on to LinkedIn without being assailed by the launch of yet another green bond. Just today, there’s news of Apple rolling out one of the largest corporate issues of environmentally-friendly debt in Europe – at €2 billion.
Also today, SKF became one of the first industrial companies to issue a green bond, raising €300 million to fund eligible green projects, supporting its recently-launched Green Finance Framework.
And that’s just in today’s news.
The head of steam is building fast in this space, with Moody’s upping its expectations on green bond issuance in 2019 saying it now estimates the full-year total will surpass €250 million, re-forecasting earlier assumptions of $200 million (€181 million) for this calendar year.
Back to ESG and its goals, Europe has largely led the field on this front (the UK dragging its heels), outstripping North American and Asian investors who have been a tad slow off the mark.
While ESG – as with beauty – is in the eye of the beholder, and all funds and lenders insist they have policies in place, a code of conduct is being adopted across the industry… but with a lack of a single methodology, the market will never truly march in step.
The problem is that nobody wants to nail their colours to the mast and compile a methodology by which infrastructure investors and lenders – and the assets they acquire or lend to – are judged.
Most people think this should fall to the ratings agencies, but they will likely want to dodge this bullet – and who can blame them?
Investors are already becoming more selective in their acquisitions based on ESG – all of them seeming to favour the E component as the easy option.
And that’s the problem with evolution.
You just can’t tell whether folk will be happy to wallow in the primordial slime of coal-fired power plants (justified on the S basis of providing energy in emerging markets); or grow a beard and don sandals while fondly smiling at wind farms and solar parks (ignoring the component parts that were mined by children in the most environmentally-damaging manner).