CONtext: the need to integrate non-financial data metrics in investment decisions

The Sustainable Development agenda has an investment shortfall of c. $50 trillion

The UNCTAD estimates that globally, the level of investment needed to achieve the SDGs will be $5 to $7 trillion per year, on average, over the period 2015-2030. In particular, if we are to successfully combat climate change, global green finance needs to reach $1 trillion by end 2020 and grow each year of the new decade.

The Corporate Fixed Income Market is perfectly placed to accelerate progress.  

Global debt has dramatically increased over the past two decades with corporate debt is estimated to be at least equal to the world’s GDP, i.e., between $80 trillion and $100 trillion. 

However, of that $80 trillion to $100 trillion market, the Climate Bond Initiative calculates that in 2018, the total amount of Green Bonds issued was $167.3 billion and forecasts approximately $250 billion for 2019 - less than 1% of the total market value. While impressive growth rates continue to see this important segment grow, the progress is nowhere near the pace required.

More evidence is required across all forms of finance, that Environmental, Social and Governance (ESG) performance correlates with financial performance. With thanks to the volume and frequency of corporate bond issuance, together with the maturing corporate acceptance and integration of ESG into business practice, the corporate debt market represents a perfect intervention point to demonstrate and scale innovative finance models to fast track sustainable investment.

Proof of Concept already exists. The focus is now to standardise and scale it.

With in market evidence that such reduced cost of capital mechanisms already exist (Solvay and Danone as two examples) the focus is not to prove this is possible - it is to fine tune it, embed a gearing mechanism to enable ever greater sustainability performance over time, then standardise and scale it.

Focusing on the next 13.5% of the adoption of innovation curve, this represents a $10 trillions opportunity over the coming years.


Engineering
System Shifts -
The S Bond
Initiative

Background Research: Estari Group White Paper (here)

  • Purpose: To integrate, standardise and wholesale the use of reduced cost of capital mechanisms, together with an incremental gearing system to enable ever greater sustainability performance over time, into the corporate vanilla bond market.

  • 2019 Target: 2 S Bonds issued in 2019, for a consideration of $5-10 billions


INVESTMENT THESIS

The key enabler required for the system shift is reliable, standardised and certifiable non financial data markers. There is currently an inefficient way the industry is working with on the one side corporate issuers defining their own processes and tools to disclose non-financial data (through sustainability reports) and on the other side investment firms defining their proprietary methods and tools to integrate non-financial data in their investment process.

With no universally agreed definition on non-financial metrics and frameworks and a dearth of corporate, ratings and independent analytics firms servicing the market, there represents a unique opportunity in the market to invest into open innovation to standardise the processes and ultimately improve investment flow.

Estari is assessing and monitoring the non financial data analytics landscape and alongside this S Bond Initiative will make a small number of select and strategic investments.


Contacts

For more information, please contact:

Systems - Kate Wolfenden | k.wolfenden@estarigroup.com 

Investment - Jean Baptiste | jb.oldenhove@estarigroup.com