A new global survey of companies and institutional investors commissioned by ING, the multinational banking and financial services corporation, shows the pandemic, as a ‘white swan’ moment – perhaps an unintended positive outcome – which has accelerated the majority of companies’ green banking and financial services corporation plans.
At the same time, investors are demanding more hard environmental targets be put in place by companies. Despite this, companies, investors, and governments must move faster and further in making environmental, social and governance (ESG) progress as the pandemic raises the bar for ambition, the ING report notes.
Looking back, 2020 was a wake-up call for corporates, investors, and governments alike.
Not only were they dealing with the impact of lockdowns, supply chain disruptions and loss of business, but the year was also marked by social unrest and extreme weather events – systematic risks that could have been foreseen. To prevent this from happening in the future, it is imperative to move even faster and further on sustainability initiatives, the study notes.
“It is now or never for the world to solve the climate crisis. We have 10 years, at best, and that is not a lot of time. The pandemic has only reinforced our resolve for the speed and breadth of what we need to do on sustainability,” said PepsiCo’s Roberta Barbieri, VP Global Sustainability, a top corporate executive, and part of an expert group who contributed to the report.
According to the new report, ‘Now or never: A new bar for sustainability’, 57 percent of companies say they are accelerating green transformation plans, and 62 percent will likely tie executive compensation to environmental targets in 2021.
Currently, less than one in 10 companies in the survey have linked executive compensation to ESG targets. From the investors surveyed, 74 percent have increased commitments for portfolio alignments to the goals of the Paris Climate Agreement and 72 percent are adopting more ambitious targets for sustainability outcomes of ESG investment.
In would seems the stars are beginning to line-up among investors wanting climate sustainability and corporate culture that will place executive compensation in accord with more comprehensive green banking goals that in past.
“The pandemic has demonstrated that individuals, companies, investors, and governments can make rapid environmental and social changes for the good, but closer alignment is necessary to rapidly accelerate progress in addressing the climate crisis,” said Gerald Walker, Chief Executive Officer for ING Americas.
“Our (collective) actions are under the microscope like never before and as the report shows, coordinated action and convergence on areas such as ESG standards and policy are essential for accountability and meeting ambitious targets.”
The ING report surveyed executive and senior management respondents about their organization’s ESG priorities, how they are embedding accountability for progress and performance, and the evolving influence of capital markets on sustainable transition. The findings include:
Companies elevate the ‘S’ in ESG, with 50 percent expecting to issue a “social bond” in the next 12 months
Employee health and wellbeing (33 percent) will take precedence for corporates over the next year, even ahead of emissions reduction (30 percent). Investors cite this as a top ESG priority too, behind only climate and sustainable supply chains.
Furthermore, over 80 percent of companies across each region expect new government sustainability policies to intensify action on improving access to healthcare, significantly more than any other area, including renewable energy projects.
Momentum behind social bond issuance and subscription rates is set to continue over the next 12 months with, 50 percent of corporates likely to issue a social bond in this time frame.
Finding include the following: Asia-Pacific (53 percent) and North American (51 percent) respondents are more likely to issue a social bond in the next 12 months than European (44 percent) respondents.
Despite short-term momentum on social issues, only 17 percent of investors would like to see companies making more externally focused social targets a top priority; investors see more ambitious environmental targets as a bigger priority (38 percent).
62 percent of companies have effectively integrated ESG information within corporate reporting, but better alignment with investor demands is needed
73 percent of those that had issued sustainable finance instruments in the past say the process improved their ability to put robust metrics in place and 62 percent say ESG information is strongly integrated within corporate reporting.
However, when it comes to disclosure, there are still misalignments between information being reported by companies and information investors believe is most material. The top challenges for companies trying to improve ESG accountability are the lack of common industry standards and integrating ESG issues with financial targets.
For other regions, finding include European (45 percent) companies highlighted the chopping and changing of ESG KPIs as the most significant challenge in improving ESG accountability, in comparison to North America and Asia-Pacific (34 percent each).
66 percent of companies say expansion and innovation in the sustainable finance market improves relevance and accessibility
The industry saw an expansion of different financing instruments, including social bond issuances, with 66 percent of companies saying the expansion of the sustainable finance market makes it more relevant and accessible for them. Companies cite the strongest appetite to issue social bonds over any other sustainability financing instrument.
The financial instrument of the social bond – as noted above – emphasizes the health and wellbeing of a company’s workforce, based on the toll exacted on workers’ health by the pandemic and the tangible fact for corporates that without a healthy workforce, they lack a viable company in many senses.
ING found that that demand for a social bond was uniform with exception of European companies where there is a marginally stronger appetite to issue green bonds over social. First-time issuers view sustainability-linked financing to test the market and learn from the process, value, and data.
According to ING: European investors (49 percent) have by far strongest appetite for sustainability-linked instruments compared to North America (26 percent) and Asia-Pacific (13 percent). Investor appetite for transition bonds is reversed with stronger appetite in Asia Pacific (47 percent) and North American (40 percent) in comparison to Europe (17 percent).
“Over the past 12 months we have seen a mentality shift whereby companies were initially taking some steps but are now taking a much more accelerated approach to sustainability. The role of capital markets is pivotal in ensuring this approach continues, providing increased transparency around measurement and ensuring sustainability is embedded with corporate strategy,” said Leonie Schreve, Global Head of Sustainable Finance for ING.
“The expansion of the sustainable finance market as evidenced by the growth in sustainability-linked instruments is vital in making sure no company with strong ambitions is excluded from being able to transition to a sustainable business.”
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