Sustainable finance has been gaining traction for years as the effects of climate change fuel interest in green bonds, but the pandemic has ushered in a wave of demand for bonds that finance social projects, such as vaccine research.
The demand for COVID-19 related social bonds comes not only from issuers – ranging from governments seeking funding for stimulus packages or companies rushing to develop treatments – but from investors as well, said Jason Taylor, co-lead of the new Sustainable Finance Group within Scotiabank’s Global Banking and Markets (GBM) division.
Already, more than 40 issuers have raised more than US$120 billion across 11 currencies in COVID-19 related bonds not including Chinese issuers, he said, citing Bloomberg and Scotiabank data.
“The demand’s really high,” he said. “All these (COVID) deals were very well taken up by investors, they were oversubscribed, meaning they had orders in excess of the amount of the transaction. The investor demand is quite broad and quite varied. You're seeing it coming from central banks, and their reserves, and you're seeing it come from regular asset managers, impact funds and bank treasuries.”
It’s the latest catalyst for interest in sustainable finance – which takes into account environmental, social and governance (ESG) considerations – that has been growing steadily over the years as governments, companies and investors alike look to adopt this lens.
According to Bloomberg NEF, as of May 2020, total issuance of sustainable debt globally has surpassed US$1.3 trillion. Issuance in 2019 grew by roughly 75% and is on track for another strong year of growth in 2020, up roughly 15% in the period up to mid-June compared with the previous year.
Last November, Scotiabank launched its Climate Commitments to support clients in the transition to a low-carbon economy and decarbonize its own operations.
Those commitments include mobilizing $100 billion by 2025 to reduce the impacts of climate change and enhancing integration of climate risk assessments in lending, financing and investing activities.
Steadfast in our commitment
As well, Scotiabank’s new Sustainable Finance Group, launched this week, will support clients’ evolving requirements for sustainable financing and ESG related investments, said Paul Scurfield, Managing Director and Head of Global Fixed Income at Scotiabank.
“We are steadfast in our commitment to support Scotiabank’s sustainability and climate change initiatives by offering innovative and high-quality sustainable finance products, solutions and advice to our clients.”
The group’s launch comes as the Sustainable Finance Market continues to grow and evolve.
Growing research around the effect of climate change on institutions and investment portfolios has been a driving factor, said Taylor.
“For a long time, climate change was considered a long-term risk. But we've seen the growing frequency of extreme weather events and the acceleration of transition risk, where economies are misaligned with the economy of the future,” he said.
Fanny Doucet, co-lead of Scotiabank's Sustainable Finance Group, estimates that green bonds, which are used to raise money for climate change and environmental projects, has historically comprised roughly 70% of the overall market, according to Bloomberg NEF.
But the dynamic is changing.
“Over the last one to two years, there has definitely been a notable shift both from the issuer perspective and the investor perspective to include more of the S and G in ESG... Since COVID-19, there’s been an even greater focus from both the investor and issuer side on what they’re doing from a social impact perspective," Doucet said.
Heightened government interest in furthering progress on climate change reduction and sustainable development efforts is another element.
In 2018, the Canadian government created the Expert Panel on Sustainable Finance to investigate ways the financial sector can help encourage and direct funds to low-carbon Canadian initiatives.
Promote sustainable investment
Last June, the panel delivered its final report and recommendations, which included several aimed at developing and scaling up market structures and financial products that would have particular impact in facilitating Canada’s transition and adaptation. One such recommendation is to “promote sustainable investment as ‘business as usual’ within Canada’s asset management community.”
“Canada has a world-leading financial system with a well-earned reputation for sound governance, risk management and regulation,” the panel wrote. “Our considerable strengths in conventional finance will play a critical role in delivering the financing ingenuity and capital flows required to execute Canada’s transition and resilience objectives. However, this will not occur under status quo financial patterns. Sustainable growth requires climate change management and mitigation to become embedded in our everyday decision-making.”
As well, the Paris Agreement, adopted by Canada and most other nations in 2015, looks to limit the global average temperature rise to well below two degrees Celsius, as well as lowering greenhouse gas development on a pathway toward a lower carbon future.
In 2015, the United Nations General Assembly adopted the 2030 Agenda for Sustainable Development and 17 Sustainable Development goals, which include no poverty, zero hunger, gender equality, and sustainable cities and communities.
The estimate amount of funding needed to achieve the objectives of both the Paris agreement and the UN sustainable development goals is a few trillion annually, but there has historically only been several hundred billion dollars of issuance per year, said Taylor, citing United Nations data.
"There's a huge funding gap for sustainability objectives," he said. "So as an institution what we're trying to do is to try to bring some creativity to help governments and corporations to better access capital markets to achieve on some of their sustainability objectives."
And given the staggering scale and scope of the COVID-19 pandemic, the demand for social bonds and other sustainable financing to fund initiatives to respond to the crisis, and help economies recover after it passes, is likely to grow.
“Sustainable finance and the focus of the market has had on ESG is here to stay,” Doucet said. “It’s not a fad. It’s something that really most of our clients are adopting, and I would say, making it a part of their DNA.”