Redmayne Bentley Market Round Up

With the COP26 climate summit drawing to a close in Glasgow, ESG investing (A.K.A investing to improve Environmental, Social & Governance challenges) has taken a front seat in investors’ minds. Many investment funds have come under the spotlight and according to Morningstar 253 funds rebranded themselves by making ESG an integral part of their investment process. They attracted twice as much money to US$ 3.9tn in 2021 to their equivalent alternatives without these mandates, according to EPFR data.

But it’s not just the equity of companies that investors are looking at. ESG bond funds now make up US$1tn of the total bond market, with more to come. However, that total market value is estimated to be at US$128tn; this being the value of funds with nil to low integration of ESG in their process. From an investor’s point of view, most of the bond funds do not meet the ESG standards at all when screened by analysts, presenting a concerning trend that such a large portion of allocated capital is not doing good, as with its equity counterparts.

Some may worry that efforts in the equity market to invest responsibly are futile, though many advanced economies are now issuing green bonds. However, with many bond investors undergoing a more strenuous phase of low yields and high inflation, they may prioritise chasing returns over a more ethical mandate.

Nevertheless, bonds may have their chance to change the dial in private markets. Thus far, public companies have come under the highest scrutiny over sustainability, though private companies generally go unnoticed, because there is less control over private enterprises. Perhaps bonds issued by private companies can provide a more roundabout way of leveraging investor control over the ethical use of capital?

In the UK, banks such as Barclays continue to lend to highly polluting fossil fuel industries; as such, it has been in the bad books of many climate advocates. Two reasons cited by analysts at Autonomous Research were loopholes and a lack of clarity on the definitions of fossil fuel restriction policies, which leave wriggle room for banks to be able to make such decisions. These discrepancies between the statements issued by banks on sustainability and their actions have raised accusations of double standards. The update on banks lending money to fossil fuels companies comes as a major setback for greener investments which could hamper the target set by the UK to become carbon neutral by 2050. Although the counter argument could be made for hard limits against financing fossil fuels being unrealistic, oil and gas will remain necessary for years and could be counterproductive if traditional industries are unable secure funding to transition into greener practices.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.