Sustainable investing has come a long way, with more than a quarter of assets under management globally now being invested with consideration of environmental, social and governance (ESG) factors. While sustainable investing was long considered a niche in equity investing, the launch of the United Nations-supported Principles for Responsible Investment (PRI) in 2006 was a catalyst for the concept to spread into mainstream investing, accelerating investor demand.
Climate change and resource scarcity, workplace productivity and product safety, along with technological advances and changing consumer preferences, are significant ESG-related risk factors that have real credit implications for a business.
Regulators, intent on meeting global climate and sustainable development commitments, are working to better integrate ESG concepts into the financial system. Concurrently, investors are not only taking greater interest in how companies address these challenges, but are also avoiding certain investments based on their ESG preferences. In turn, new fixed-income products have been developed and are expanding rapidly to meet growing investor demand. As mainstream capital markets increasingly find ways to address ESG-related risks and opportunities, many of which are not easily discernible on financial statements, we expect these trends to continue.
Led by the UAE, the GCC over the past few years has been investing in renewables, particularly solar power, and already hosts an active and growing green energy market. The International Renewable Energy Agency (Irena) in its 2019 report expects that nearly 7 GW of new renewable power generation capacity is expected to come online by the early 2020s. These are all transactions that could be funded via green finance.
The first green bond in the region was issued by the National Bank of Abu Dhabi (now First Abu Dhabi Bank, after its merger with First Gulf Bank) in March 2017, for a total of $587 million (Dh2.8 billion). In green loans, we have seen Masdar in Abu Dhabi tap the market with a green $75m revolving credit facility (RCF) in September 2018 to fund its sustainability projects.
But how does an investor measure the ‘sustainability’ of an investment?
On the back of market demand for rankings that consistently measure risk and environmental impact, S&P Global Ratings also created a tool to specifically measure the ‘green-ness’ of a financing. Launched in 2017, the Green Evaluation is an asset-level environmental credential, which aims to provide investors with a more comprehensive picture of the green impact and climate risk attributes of their portfolios. It can be used for any type of financing and sets a new standard in the green finance market.
The Green Evaluation works by compiling an aggregated score for any project based on analysis of three factors: the transparency, governance, and either the mitigation or the adaptive impact of a project, with a final score out of 100 delivered to investors. ESG factors have the potential to affect creditworthiness, but S&P Global Ratings has also developed some tools to help investors make sustainable decisions beyond credit quality with conviction; our ESG Evaluation and Green Evaluation.