New regulatory challenges relating to non-financial reporting will in the next five years bolster the importance of sustainable investments.
Several weeks before the Covid-19 lockdown, we took part in a series of meetings in London with global fund managers whose investment strategies integrate ESG (Environment, Social, Governance) factors.
The discussions raised many interesting observations and conclusions.
However, what struck me the most was one asset manager’s unequivocal declaration: “We do not lower the standards for emerging markets compared to developed markets. Risk is risk.”
His statement casts new light on capital market investments.
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In the classical model of investing on the capital market, investment portfolios are differentiated depending on the region of allocation. Assets of developed market funds account for 60 per cent of all global investments. According to a number of different criteria, emerging markets are considered less attractive and a higher risk. However, once the investment paradigm shifts and all markets are considered on a par according to the ESG criteria, the volume of investments in emerging markets can grow.
To prove the point, consider recent statistics of sustainable investment. According to a Morningstar report, global assets of ESG funds reached 40.5 trillion US dollars at the end of 2020. In the fourth quarter of 2020 alone, 150 billion US dollars was invested in ESG funds, mainly in Europe (120 billion euros).
Three out of four sustainable equity funds outperformed market benchmarks in 2020 while 25 out of 26 ESG index funds outperformed broad market funds. Long-term returns point in favour of sustainable investments, for example the MSCI Emerging Markets ESG Leaders index gained 150 per cent in the last 10 years, compared to returns of 59 per cent generated by the broad MSCI Emerging Markets index in the same decade.
A new investment trend
Public companies listed on Central European exchanges are following the new investment trend. Companies increasingly provide stakeholders with non-financial reports prepared under the highest global standards.
As a result, international investors get access to crucial information relevant to their decision-making models. Companies in France, Germany or Sweden just like companies in Poland, Czechia and Hungary which publish ESG reports are assessed against the same criteria and may raise the same capital.
Importantly, investment banks’ assets integrating ESG factors already account for 30 per cent of their total investments, expected to rise up to 100 per cent of some investment portfolios within 5-10 years.
Alternatively, companies can raise growth funds by issuing green bonds. The very first Polish companies successfully placed debt on the capital market last year, expecting to use proceeds to finance or refinance renewable energy, clean transport, and environmental protection projects.
Regional funds with a focus on green investments have emerged on the CEE markets with a climate-friendly mission setting new trends in favour of lasting changes.
The role of exchanges
Stock exchanges, which match issuers and investors, play an important role in promoting sustainable investments. Communication between exchanges and investors help to identify investors’ demand for non-financial information, which in turn helps investors prepare ESG reports. As a result, investors get exactly what they need to run analyses and make investment decisions.
The process is supported by solutions dedicated to companies, including reporting manuals, trainings and workshops. According to the Sustainable Stock Exchanges Initiative which promotes sustainable financing, 61 exchanges around the world have published ESG reporting guidelines for companies, including CEE exchanges in Budapest, Riga, Tallinn, Vilnius and Warsaw.
New regulatory challenges relating to non-financial reporting will in the next five years bolster the importance of sustainable investments.
More companies than ever before will be required to publish environmental, social, and governance disclosures. These developments will certainly address investors’ needs and attract greater investor interest in the capital markets across Europe.
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