Global Markets ESG Insights 7th July 2021 - MUFG ...
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Global Markets ESG Insights
7th July 2021
Derek Halpenny
Head of Research,
Global Markets EMEA and International Securities
Lee Hardman
Currency Analyst
Ehsan Khoman
Head of Emerging Markets Research – EMEA
Carlo Mareels
Financial Credit (Europe)
Konrad Boszko
Corporate Credit (Europe)
A member of MUFG, a global financial group
Contents
ESG considerations in global macro p3
ESG considerations in FX and derivatives p 11
ESG consideration in credit markets p 20
2
ESG considerations in global macro 3
ESG vs conventional equity index performance│Europe trails the US and EMs
Mixed developments
Contrary to 2020, the US ESG index has produced better results than its conventional variant since March 2021, whilst European peers have trailed
EM ESG index has demonstrated consistent outperformance in 2021 – the only gauge relative to the US and Europe, showing long-term successes
Europe ESG continues to underperform Europe
114 MSCI Europe ESG and conventional index (rebased 1 January 2021 = 100) Conventional
112 Since the start of 2021, MSCI
110 ESG
MSCI Europe Index Europe ESG leaders index has
108 consistently underperformed its
106 MSCI Europe ESG Leaders Index conventional peer
104
This is part could be explained by
102
either overvaluation of ESG
100
across Europe given their sheer
98
early dominance in the space and/or
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EU taxonomy uncertainties
US ESG has outperformed since March US
114 MSCI US ESG and conventional index (rebased 1 January 2021 = 100) ESG
112 Contrary to 2020, the MSCI US
Conventional
110 ESG leaders index has
MSCI US ESG Leaders
108 outperformed its conventional peer
MSCI US
106 since the start of 2021
104 Investor concerns on inflation,
102 rising rates and the impact on
100 long-duration assets has led to an
98 underperformance of conventionals
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relative to ESG
Emerging
Markets
EM ESG is consistently outperforming Emerging Markets
116 MSCI EM ESG and conventional index (rebased 1 January 2021 = 100)
114
EM ESG equities have
112 outperformed conventionals this
MSCI EM ESG (Net Total Return)
110 ESG
year as investors turn to cheap
108 MSCI EM (Net Total Return) assets that are expected to
Conventional
106 increasingly meet ESG targets
104
With higher returns on offer
102
100 without a materially larger level of
98 risk taking, EMs offer an
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increasingly attractive risk-reward
value proposition
4
(Source) Bloomberg, MUFG ResearchESG vs conventional bond index performance│ESG outperforms during risk-on
ESG has performed well during uncertainty this year
Despite the rise in Treasury yield that has compressed excess returns, US and European ESG corporate indices slightly outperform conventionals
ESS bond strategies have proven to be beneficial during periods of market stress and rising interest rates with continued outperformance
US ESG slightly outperforms US
0
MSCI US Corporate ESG and conventional index (rebased 1 January 2021 = 100)
-1 US ESG weighted bond indexes
Total Returns (%)
-2
have marginally outperformed
ESG conventionals this year, despite
-3 Conventional the rise in US Treasury yields that
-4
MSCI US Corporate ESG Index
has compressed excess returns
-5 ESG strategies have proven to be
US Corporate Conventional Index
-6
beneficial during periods of market
stress and rising interest rates
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Europe ESG slightly outperforms Europe
0.4 MSCI Europe Corporate ESG and conventional index (rebased 1 January 2021 = 100)
0.2 Similarly to the US, European
Total Returns (%)
0.0 ESG weighted bond indexes have
-0.2 marginally outperformed
-0.4 conventionals this year, with
ESG broadly analogous rationales
-0.6 MSCI Euro Corporate ESG Index Conventional
-0.8
-1.0 Euro Corporate Conventional Index
-1.2
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Emerging
Markets EM ESG materially outperforms notably during risk-on Emerging Markets
0.5 ESG Asia and conventional Asia credit (rebased 1 January 2021 = 100)
As with the equity counterparts,
0.0
ESG bonds are outperforming
Total Returns (%)
ESG
-0.5 conventionals as investors turn to
Conventional
cheap assets that are expected to
-1.0 increasingly meet ESG targets – this
ESG EM Asia Credit Index
-1.5
trend is set to continue given the
ESG Asia Conventional Credit Index increasing focus on announcing and
-2.0 executing ESG strategies across the
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EM complex
5
(Source) Bloomberg, MUFG ResearchESG vs conventional ETFs performance│clean energy retrace early 2021 gains
Overbought ESG fears prompting a rotation to cheaper shares
Following the rapid outperformance earlier this year on policy optimism, clean energy ETFs have all but erased gains since March 2021
With investment strategies historically following results, markets have remained susceptible to outflows leading to an easing of ESG ETFs
ESG clean energy ETFs retracing early 2021 gains Comments
Performance of clean energy ESG ETFs vs conventional market (rebased 1 January 2021 = 100)
120 Investors have sharply sold shares of
115 clean energy companies geared towards
MSCI world ESG since early February amid fears
110
market that the sector had become overvalued
105 with a pivot towards cheaper stocks
100
95 Three leading ESG clean energy ETFs
90
– iShares Global Clean Energy,
Invesco Global Clean Energy and
85 Invesco Solar ETF
Invesco Solar – continue to
iShares Global Clean Energy ETF
ESG clean
80
energy ETFs
underperform the MSCI world market,
75 Invesco Global Clean Energy ETF and other leading clean energy funds
MSCI World Index
have also not been spared
70
65
Core reasons for the ESG ETF
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underperformance include:
1. President Biden’s USD2.3tn
infrastructure plan has failed to elicit
ESG and sustainable equities dominate assets ESG ETF flows have eased in recent months the enthusiasm that markets had
ESG ETF assets by investment class (USD bn) ESG ETF flows by investment class (USD bn) initially priced in
350 22
Fixed Inc. - Religious and Exclusionary ETFs
2. ESG clean energy funds took a hit in
Fixed Inc. - Religious and Exclusionary ETFs 20 April after Enphase Energy – a popular
300 Fixed Inc. - ESG and Sustainabilty Themed ETFs 18 Fixed Inc. - ESG and Sustainabilty Themed ETFs holding – reported major
16 Fixed Inc. - Green Bond ETFs
semiconductor shortages and
250 Fixed Inc. - Green Bond ETFs
14 supply-chain issues, which is causing
Equity - Religious and Exclusionary ETFs Equity - Religious and Exclusionary ETFs havoc in the clean energy, automotive
200 12
10 Equity - ESG and Sustainability Themed ETFs
and consumer electronics space
Equity - ESG and Sustainability Themed ETFs
150 8 broadly
6
100
4 With investment strategies historically
50 2 following results, markets have
0
remained susceptible to outflows
0
-2
leading to an easing of ESG ETFs
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6 (Source) Bloomberg, MUFG ResearchESG commitments│unprecedented pledges march on
Pledges are rising exponentially
ESG commitments are garnering momentum with increasing pledges by corporates to reduce their emissions in line with the Paris Agreement
Expectations are that the pace of growth in commitments will rise in the months ahead as ESG considerations become more mainstream
New SBTI commitments less consistent in 2021 Year-to-date a record 437 entities joined SBTI Comments
Science based commitments, monthly (number of Science based commitments, cumulative (number of
entities) entities) The science based targets initiative
140 600 (SBTi) is posting strong drive with 437
2020
corporates having joined the SBTi year-
120 500 to-date – more than double the 193
2021 corporates to make similar commitments
100 2019
400 in 2020 through May
80 Diesel
300 Notable corporates to set or commit to
60 set a target in recent months include
200 2018
40
DaVita, Infosys, Magna International,
The Home Depot and Nasdaq – some
100
20 65 of the initiative’s newest members
are based in the EU
0 0
Gasoline
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Notwithstanding new supporters of the
2018 2019 2020 2021 2018 2019 2020 2021 task force on climate related financial
disclosures (TFCD) has fallen in the
Noticeable dip on TFCD commitments 2021 still remains the best performing year last month of data, year-to-date some
TCFD commitments, monthly (number of entities) TCFD commitments, cumulative (number of entities) 450 corporates have announced their
support for TCFD, pledging to augment
160 800 their financial reporting to disclose the
2020
risks and opportunities for their
140 700
businesses as a result of climate change
120 600 – up from 296 in 2020 through May
100 500
2021 Notable corporates supporting TCFD in
80 400 2019
recent months include Brookfield Asset
60 300 Management, the Norwegian
2018 government, GSK and Marks &
40 200
Spencer
20 100
0 0
Industry TCFD is launching a consultation on
best practices for portfolio alignment
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metrics in the financial sector – to be
2018 2019 2020 2021 2018 2019 2020 2021
published before COP26 in November
7 (Source) Bloomberg, Science based targets initiative (SBTI) which is a “joint initiative by CDP, UNGC, the WRI and WWF intended to increase corporate ambition on
climate action required by science to limit warming to less than 1.5ºC/2ºC in accordance with the Paris Climate Agreement, Task Force on Climate Financial DisclosuresInflation-linked ESG│conundrum in a reflationary scenario
Narrative that ESG is intrinsically inflationary
A confluence of structural underinvestments, the push for green initiatives and ESG’s negative supply shock could spur inflationary expectations
Until we reach a point wherein the “E” in ESG becomes mainstream in energy intensity to GDP, oil prices will oil rise and with it so will inflation
Comments Inflation expectations fell with shale growth … … so did consumer inflation expectations
Brent (USD/b) and US 5Y5Y breakevens (%) US 5YR TIPS implied breakeven (%)
Weak returns owing to structural
underinvestments translates into a 160 3.2 3.2
growing supply gap, with ESG Shale shock resulted in a
140 3.0 3.0
shift lower in inflation
considerations having further reduced 2.8 2.8
120
expectations
investment, and COVID-19 leaving 2.6 2.6
inadequate production capacity to meet 100 2.4 2.4
the vaccine-led demand recovery
80 2.2 2.2
60 2.0 2.0
The “E” in ESG attempts by design to
1.8 1.8
restrict oil production – or increases 40
1.6 1.6
costs of drilling and financing – will 20 1.4 1.4
prove inflationary in the near-to-
0 1.2 1.2 ESG is now unwinding the
medium term given the still negligible
shale revolution
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
share of transportation demand – in 1.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
other words, ESG green initiatives will Brent (USD/b) (Left Axis)
therefore “help” near-term oil demand, US 5Y5Y breakevens (%) (Right Axis)
long before they “hurt” oil demand, with Carbon emission price have risen sharply
support oil prices which in-turn will fuel Contained shale supply to high oil prices
inflation Brent (USD/b) and US rig count (unit) EU carbon emissions (EUR per metric ton)
In essence, ESG is a negative supply 60
160 Lack of supply response to 2,200
shock that internalises the climate cost ESG considerations causing a
higher oil prices in part 2,000 sharp uptick in EU carbon
of the production of goods and services 140 50
due to ESG effects emission prices, spurring
– this negative supply shock will be 120 is driving oil prices
1,800
inflationary effects
inflationary until technological higher (and with it 1,600 40
progress absorbs these costs, which 100 1,400
inflation)
is of a medium-term phenomenon 80 1,200 30
60 1,000
ESG, the Fed's Average Inflation 800
20
Targeting (AIT) regime and a 40
600 10
significantly more proactive fiscal 20 400
policy, constitute a significant
0 200 0
combination that could be supportive of
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a higher inflation environment than
experienced over the last decade Brent (USD/b) (Left Axis) US rig count (Right Axis)
8 (Source) Bloomberg, MUFG ResearchESG & Central Banks│Impact on monetary policy
Climate Change rapidly becoming part of monetary policy decision making
Climate Change Stance & Climate Change Stance &
Action Action
ECB President Lagarde Federal Reserve Chair Powell
“We would be failing in our “Today, climate change is not
mandate if we did not account for something that we directly
climate change when it comes to consider in setting monetary
understanding and measuring policy. We are not and do not seek
inflation” 4th June 2021 to be climate policy makers as
such” 4th June 2021
The ECB announced in
September 2020 that it would The Supervision Climate Committee
accept sustainability-linked bonds was launched in Jan 2021 to monitor
as collateral, effective 1st January climate change risks to financial
2021. Also eligible for outright institutions supervised by the Fed. In
purchases under PEPP and APP March 2021 the Fed announced the
subject to compliance with launch of the Financial Stability
programme-specific eligibility Climate Committee to identify and
criteria. address climate change risks on a
macro-prudential level.
Climate Change Stance & Climate Change Stance &
Action Action
BoE Governor Bailey BoJ Governor Kuroda
“When it comes to climate change, “We have a great interest in climate
we cannot stand still. We need to change and how we respond to this
continue to be bold and learn from at the level of monetary policy will
our work so far to deepen our become a topic of discussion” 4th
understanding and inform future June 2021
actions” 3rd June 2021
The BoJ at its monetary policy
The BoE launched its “Climate meeting in June announced a new
Biennial Exploratory Scenario” corporate lending fund for banks to
(CBES) in June 2021 to gauge the lend at favourable rates to
resilience of the financial system. companies linked to the adherence
Taskforce on Climate-related to certain climate change goals.
Financial Disclosures established
and climate disclosures will be
9 9 mandatory from 2025.ESG & Infrastructure Spending│More focus on going Green
EU infrastructure spending plans underlines environmental focus
Recovery & Resilience NextGenerationEU Contribution to Funding Details
Facility NextGenerationEU Other Programmes
1. EUR 80bn of bond issuance
Power Up expected in 2021.
Clean technologies & renewables 2. EU to establish its green bond
React-EU framework by September. Up to
Renovate 83.1
50.6bn 30% of recovery fund debt will be
Energy efficiency of buildings
Just Transition Fund issued through Green Bonds.
Recharge and Refuel 10.9bn 3. Debt will be issued between mid-
Sustainable transport and charging
338 Rural Development 2021 and 2026.
stations
8.1bn 4. All borrowing will be repaid by
Connect EUR 806.9bn 2058.
Roll-out of rapid broadband services InvestEU
6.1bn 5. The EU will use a “diversified
Modernise funding strategy” using different
Digitalisation of public administration 385.8 Horizon Europe funding instruments & techniques
5.4bn
Scale Up 6. Funding plans communicated to
Data cloud and sustainable RescEU the markets on a bi-annual basis.
processors 2.0bn 7. Medium to long-term bonds,
Reskill and Upskill some as Green bonds and EU-
Education and training to support bills.
digital skills Grants Loans Other
Source: European Commission
Green and Digital Priorities Sources of revenue (or possible revenue) turning greener also
Carbon Border Corporate Sector
Adjustment Mechanism Financial Contribution
A Digital Levy A Common
Corporate Tax Base
EU Emissions Trading Revenue from Non-
System Recycled Plastic
1 10 A Financial Transaction
Source: European Commission
0 TaxESG considerations in FX and derivatives 11
Sustainability-linked derivatives│Recently Issued FX Derivatives (1)
A range of sustainability-linked derivatives has been issued over the past several years, which add an ESG pricing component to conventional
hedging instruments such as IRS, cross currency swaps or forwards.
These transactions are highly customizable and use various key performance indicators (KPIs) to determine sustainability goals.
As this is a niche, nascent market, the transaction volume has been very low, and uptake is expected to be gradual.
Issuer Deal Information Sustainability-linked Characteristics
The agreements introduced a carbon intensity KPI,
Drax, a UK-based renewable In April 2021, Drax signed two ESG-linked FX whereby Drax will receive a sustainability-linked
power generator derivative agreements with Barclays and Natwest premium payment for reducing its carbon intensity
Markets. below a pre-set threshold.
Under Drax’s deals with Barclays and NatWest The premium is calculated based on transaction
Markets were implemented as an overlay to their volume and tenor monitored throughout the year, with
International Swaps and Derivatives Association the ESG component tested at year-end. So long as
master agreements, with the aim of taking a holistic Drax meets its carbon intensity KPIs, the company will
view of the company’s FX activity. receive the amount that is accrued throughout the 12-
month period the following year.
Enel, an Italian power and gas In October 2020, Enel issued GBP500 million of The bonds are linked to company’s ability to reach at
company sustainability-linked bonds. least 60% renewable generation within its total
Enel also executed a sustainability linked cross- installed capacity by 31st December 2022.
currency swap with JP Morgan chase to hedge against Achievement of target will be certified by an auditor’s
GBP/EUR exchange rate and interest rate risk. specific assurance report.
Interest rate on bonds will remain unchanged to
maturity, unless Enel fails to achieve the sustainability
performance target. If target is not achieved, a step-up
mechanism will be applied, increasing the rate by 25bp
as of the first interest period after publication of
assurance report of the auditor.
Enel and JP Morgan will pay interest to each other on
the borrowed money every six months on the cross-
currency swap. That interest cost can rise if either side
does not keep up to tis environmentally friendly targets.
JP Morgan has pledged to help arrange USD200 billion
of funding this year for climate change action and the
UNSDGs, which include activities such as underwriting
green bonds.
12 (Source) ISDA – Overview of ESG-related Derivatives Products and Transactions (January 2021), Risk.netSustainability-linked derivatives│Recently Issued FX Derivatives (2)
Issuer Deal Information Sustainability-linked Characteristics
Hysan Development, a Hong Kong In October 2020, BNP Paribas executed a USD125 million
Under the terms of the transaction, Hysan committed
property developer approximately 15-year sustainability-linked hedge. to remain as a constituent member of the Hang Seng
Corporate Sustainability Benchmark Index for the
period between 2021-2024. It ranks the top 20% of
Hong Kong companies based on their sustainability
performance on broad metrics.
If Hysan is not successful in reaching the two goals, it
will contribute to an impact-driven charity approved by
BNP Paribas.
Primetals Technologies, an In October 2020, Deutsche Bank entered into an FX If Primetals Technologies fails to meet agreed
engineering and plant transaction that links currency options to sustainability sustainability targets, it must pay a predefined sum to a
construction company goals. The agreement enables Primetals Technologies contractually defined non-governmental organization.
to hedge its currency risk with FX options over a four- The currency hedge is linked to several sustainability
year period. targets, including the proportion of total sales of
projects that aim to reduce greenhouse gas emissions
for customers, and revenues relative to research and
development expenditure that result in improved
resource efficiency. Another metric is the promotion of
a safe and healthy work environment for all staff at
Primetals Technologies.
Independent consultants will monitor & certify whether
the targets are adhered to for life of the option.
The transaction allows Olam International to lock in a
Olam International, a major food In June 2020, Deutsche Bank executed an FX
discount when it meets pre-defined ESG targets, which
and agri-business company derivative linked to ESG key performance indicators
support the UNSDGs.
(KPIs). A one-year USD/THB forward enables Olam to
The transaction KPIs will contribute to 10 of the 17
hedge its FX risk arising from exporting agriculture
UNSDGs, including alleviating poverty (UNSDG 1),
products from farms in Thailand to the rest of the
alleviating hunger (UNSDG 2), improving gender
world.
quality (UNSDG 5), improving clean water and
sanitation (UNSDG 6), reducing inequalities (UNSDG
10), increasing responsible consumption and
production (UNSDG 12), contributing to climate action
(UNSDG 13), protecting life on land (UNSDG 15), and
increasing partnerships for the goals (UNSDG 17)
13 (Source) ISDA – Overview of ESG-related Derivatives Products and Transactions (January 2021)Sustainability-linked derivatives│Recently Issued FX Derivatives (3)
Issuer Deal Information Sustainability-linked Characteristics
Siemens Gamesa, a supplier of Depending on whether Siemens Gamesa reaches its
wind power solutions sustainability targets, BNP will reinvest any premium
In October 2019, BNP Paribas executed a EUR174
into reforestations projects.
million FX hedging contract. The transaction aims to
If Siemens Gamesa misses its annual minimum ESG
hedge Siemens Gamesa’s FX exposure from selling
score, it must pay a sustainability premium, which BNP
offshore to the UNSDG targets related to climate action
Paribas will reinvest in reforestation projects. The
and affordable and clean energy.
premium is calculated using a metric assigned by third-
party sustainable finance specialists RobecoSAM.
Enel, an Italian power and gas In September 2019, Societe Generale executed a As part of the transaction, Enel received a discounted
company sustainable-development-goal-linked cross-currency rate based on its commitment to sustainability
swap tied to EUR1.5 billion bond. The swap enables performance. Societe Generale provided the discount
Enel to hedge its exposure against the EUR/USD as part of its commitment to the positive impact finance
exchange rate and interest rate risk created by the and based on Enel’s positive contribution to one of the
different denomination of the bond repayments (US pillars of sustainable development (economic,
dollars) and the source of repayments (euros). environmental and social) and mitigation of any
potential negative impacts to any of the pillars.
Enel’s bond is linked to the company’s ability to
increase its installed renewable electricity generation
capacity from 45.9% to 55% by December 2021.
Should Enel not be able to achieve this objective, the
interest on the bond will rise by 25bp to 2.9%. This will
be carried over to the accompanying cross-currency
swap, which will be rebooked if the bond coupon
changes.
14 (Source) ISDA – Overview of ESG-related Derivatives Products and Transactions (January 2021)ESG FX Investing│ESG FX investing is a nascent strategy
ESG is most extensively applied to equity investing, but can be applied across all asset classes and strategies. ESG currency investing is at this
stage a nascent strategy.
The expected impact of ESG currency investing accumulates with the number of investors and currency managers applying it, as well as the scale
of capital behind such investments.
How can ESG be applied to currency investing?
One approach to ESG currency investing is to integrate country-level ESG data as a factor guiding allocation.
In 2018, Record Currency Management launched a systematic ESG factor in its EM currency strategy based on a composite index developed in-house. They used
the UN SDGs to amp a range of concerns important to investors and policymakers, then used fundamental and statistical criteria to focus our list in a way relevant to
currency. ESG data helps them to detect sources of value and risk. One research project is disaggregating the characteristics that define return and risk into factors,
which include valuation, yield, and ESG. Social and environmental factors such as education, integration to global trade, and energy efficiency contribute to
macroeconomic variables that support as currencies intrinsic value particularly productivity growth and interest rates. Over time, ESG will become a recognized risk
factor for DM currencies as well.
Engagement with Counterparties
The idea is that trading could temporarily suspend trading with a counterparty that had poor or deteriorating ESG ratings. Banks’ ESG performance is assessed on
criteria such as their internal policies, scope 3 carbon effects, and financing of carbon intensive sectors, based on data, reports, and external analytics including news
and controversy reports. It all feeds into a ranking of banks, upon which the quarterly discussions and engagement with banks’ sustainability teams are based.
Currency channels for affecting change
1 2
Helping to fund deficits in the current account
Reducing a country’s cost of capital . and/or fiscal balance . Purchases of a
Investment in a country’s currency can reduce country’s currency can help fund deficits in the
the local cost of capital, incentivising current account and/or fiscal balance,
investment and improving long-run reducing the country’s need for higher interest
productivity. rates to attract capital.
3 4
Allowing central banks more room for Allowing greater scope to increase FX
accommodative monetary . Currency reserves and reducing perceived sovereign
purchases supporting exchange rate stability credit risk. . in certain cases, currency
can create room for more accommodative appreciation can afford a country greater
monetary policy, providing further incentives scope to increase its foreign currency
for productivity-boosting investment. reserves.
15 (Source) Record Currency ManagementAssessing Sovereign Risk│Adding in ESG
E S G
Environmental Social Governance
• Climate Change • Human rights • Institutional strength
• Water resources & • Education & human capital • Corruption
pollution • Health levels • Regime stability
• Biodiversity • Political freedoms • Political rights & civil
• Energy resources and • Demographic change liberties
management • Employment levels • Rule of law
• Bio-capacity & • Social exclusion & poverty • Regulatory effectiveness
ecosystem quality • Trust in society/instututions and quality
• Air pollution • Crime & safety • Accounting standards
• Natural disasters • Food security • Government finances
• Natural resources
Economic Factors Influencing credit Worthiness
Economic strength External debt
Economic growth prospects Foreign liquidity
Balance of trade Cash reserves
Fiscal performance Monetary flexibility
Credit Risk Indicators
Credit ratings CDS spreads Bond yields Bond prices
16 (Source) ESG in Sovereign Bonds – Allianz Global InvestorsMethodology behind an ESG Index│Weighing up ESG measures The ESG Index or ESGI (Environmental, Social & Governance Index) is a composite measure focusing on socially responsible conducts. It is based on 44 variables and covers 176 countries and territories. 17 (Source) Global Risk Profile Sarl (https://.risk-indexes.com)
ESG rankings│G10 scores do not paint a positive picture for USD
The CHF, SEK and NOK are the best ESG ranked G10 currencies. In contrast, the USD has the worst G10 ESG score by some distance.
If ESG becomes more important factor in FX investing flows, based on current rankings it would favour a stronger CHF, SEK & NOK against the
USD.
G10 ESG Scores (Lower scores & rankings are better)
Rankings
ESG Score Environment sub-index Human Rights sub-index Health & Safety sub-index
CHF 9.85 3 6 4
SEK 12.15 8 3 32
NOK 12.45 9 4 17
AUD 15.11 12 14 22
EUR 15.17 12 15 20
NZD 15.33 19 5 18
JPY 16.37 14 21 5
CAD 18.05 23 13 43
GBP 18.13 4 30 38
USD 32.38 34 71 51
Break down of EUR Aggregate
Rankings
ESG Score Environment sub-index Human Rights sub-index Health & Safety sub-index
Germany 12.2 10 7 6
France 16.69 5 23 41
Italy 17.16 21 16 14
Spain 18.3 13 24 26
Netherlands 15.09 11 12 37
Belgium 14.36 15 11 9
Austria 12.83 6 15 8
Ireland 16.53 16 17 15
Finland 10.13 7 1 10
Portugal 17.83 26 9 24
Greece 21.59 24 34 3
Euro-zone (GDP-weighted) 15.17 12 15 20
18 (Source) Global Risk Profile Sarl (https://risk-indices.com)ESG rankings│EM scores highlight a wide divergence in performance
Large heterogeneity prevails across EM on ESG scores but a general trend is that CEE leads.
The CZK has the best ESG score and at the other extreme the INR has the worst.
EM ESG Scores (Lower scores & rankings are better)
Credit Ratings Rankings
ESG Score S&P Moody's Environment sub-index Human Rights sub-index Health & Safety sub-index
CZK 18.27 AA- Aa3 20 19 13
KRW 23.84 AA Aa2 27 31 31
PLN 25.54 A- A2 37 27 11
HUF 28.7 BBB Baa3 32 45 16
RON 29.51 BBB- Baa3 31 48 42
CLP 31.61 A A1 43 39 52
SGD 31.71 AAA Aaa 39 46 23
ILS 34.12 AA- A1 30 87 48
ARS 34.32 CCC+ Ca 51 26 80
MYR 43.03 A- A3 66 90 62
BRL 43.16 BB- Ba2 54 83 87
RUB 45.54 BBB- Baa3 59 135 28
COP 46.47 BB+ Baa2 53 112 89
PEN 47.52 BBB+ A3 86 62 105
ZAR 48.38 BB- Ba2 93 64 110
THB 50.75 BBB+ Baa1 80 125 82
TRY 51.64 B+ B2 118 114 58
CNY 53.07 A+ A1 116 137 27
PHP 59.36 BBB+ Baa2 108 123 132
IDR 60.77 BBB Baa2 111 136 131
INR 69.05 BBB_ Baa3 167 155 129
19 (Source) Global Risk Profile Sarl (https://risk-indices.com)ESG considerations in credit markets 20
European Banks│ESG has become a top priority
European banks ESG issuance volumes
Volume in EUR equivalent Total outstanding YTD Issuance
Social bonds 14,788,030,832 4,589,137,367
Green bonds 56,020,693,351 15,088,137,341
Sustainab bonds 3,932,276,143 2,435,863,985
Total ESG bonds 74,741,000,326 22,113,138,693
Total Europe bank bonds 1,819,609,230,758 220,190,407,553
Source: MUFG, Bloomberg
• Also in European banks ESG has become a top priority as reflected in the EUR22bn worth issued YTD across
currencies and subordinations
• This brings the total stock of outstanding ESG bonds out of European banks to EUR74bn
• All major banks set themselves ESG targets aiming to support their customers in sustainable financing and
investments; ESG ratings are now a prominent feature in most banks’ presentations
• There are advanced frameworks and metrics aiming to quantify the ESG progress of banks and there is detailed
ESG reporting to enhance transparency
• Senior management’s remuneration is often linked to these ESG achievements as well
21European Banks│Strong pick-up in ESG issuance
YTD ESG issuance out of European banks strongly outpaces existing stock levels as a % of total sector volumes
12%
10.04%
10%
8%
6.85%
6%
4.11%
4% 3.08%
2.08%
2% 1.11%
0.81%
0.22%
0%
Social bonds Green bonds Sustainab bonds Total ESG bonds
Total outstanding stock YTD Issuance
Source: MUFG, Bloomberg
• European banks ESG bond volume still modest at circa 4% of total banks bonds (senior/subordinated) outstanding
• However, the new issue flow of ESG is much above that with YTD just above 10% of banks issuance in ESG format,
pointing at further growth in outstanding stock over the years
• At the same time demand for ESG bonds is also growing as the current spread levels of ESG bank bonds seem to
indicate a premium of between 4bp and 8bp in spread over ASW versus the same bank bond without the ESG format
• This delta will need further monitoring, but so far the behaviour of the ESG bond is very much in line with the broader
bank spreads moves
22European banks ESG│Brief principles overview
European Union: Article 98(8) of the Capital Requirements Directive (CRDV) and Article 35 of the Investment Firms
Directive (IFD) mandated the EBA to develop a report providing uniform definitions of ESG risks, and appropriate
qualitative and quantitative criteria (including stress test and scenario analysis) for the assessment of the impact of ESG
risks on the financial stability of institutions in the short, medium and long term.
ICMA (International Capital Markets Association published ESG guidelines and principles:
Green Bond Use of Proceeds
Green bonds enable capital-raising and investment for new and existing projects with environmental benefits:
Renewable energy, Pollution prevention and control, Terrestrial and aquatic biodiversity conservation, Sustainable water
and wastewater management, Eco-efficient and/or circular economy adapted products, production technologies and
processes, Energy efficiency, Environmentally sustainable management of living natural resources and land use, Clean
transportation, Climate change adaptation, Green buildings
Social Bond Use of Proceeds
Social bonds are use of proceeds bonds that raise funds for new and existing projects with positive social
outcomes: Affordable basic infrastructure, Affordable housing, Food security and sustainable food systems, Access to
essential services, Employment generation / programs designed to prevent and/or alleviate unemployment stemming
from socioeconomic crises, Socioeconomic advancement and empowerment
23European Corporates│ESG (1)
• ESG themes have become increasingly relevant in corporate credit, with very strong momentum in both
issuance of ESG bonds and investor appetite, the latter which has been fuelled by record inflows into ESG
funds.
• Issuance of ESG bonds among the Euro corporate investment universe continues to grow rapidly year-on-year.
• Green bonds remain the most popular in terms of volumes, but we have seen increasing numbers of corporates
issuing suitability-linked bonds and social bonds too.
• Utilities as a sector remains the biggest issuer across all three sub sectors at over 50% of total issuance, after
that we see REITs, Industrials and Autos all increasing their ESG labelled issuance.
Corporate Euro ESG Bond Issuance
Source: MUFG, Bloomberg
24European Corporates│ESG (2)
Specialist ESG Providers
• The importance of ESG themes in investment analysis
3 Pillars 10 Themes 35 ESG Key Issues
and increasingly in credit has meant that whole new Environment Climate Change Carbon Emissions Financing Environmental Impact
teams have emerged to focus on ESG analysis. Product Carbon Footprint Climate Change Vulnerability
Natural Capital Water Stress Raw Material Sourcing
• Each of the pillars: Environment, Social, Governance Biodiversity & Land Use
has multiple underlying themes; therefore the Pollution & Waste Toxic Emissions & Waste Electronic Waste
associated volume of data and its scope when Packaging Material & Waste
assessing ESG quality of individual bonds, issuers and Environmental Opportunities in Clean Tech Opportunities in Renewable Energy
Opportunities Opportunities in Green Building
sectors has increased materially.
Social Human Capital Labour Management Human Capital Development
Health & Safety Supply Chain Labour Standards
• This is further compounded by mixed, sometimes Product Liability Product Safety & Quality Privacy & Data Security
patchy disclosure by issuers which has fuelled rapid Chemical Safety Responsible Investment
growth of third party companies that provide ESG Financial Product Safety Health & Demographic Risk
ratings. Some of the biggest ESG scoring/data Stakeholder Controversial Sourcing
companies include, MSCI, Sustainalytics, Viego Eiris, Opposition Community Relations
Social Opportunities Access to Communications Access to Health Care
KLD and RobecoSAM, but there are many others.
Access to Finance Opportunities in Nutrition & Health
• Whilst specialist input is needed in this rapidly Governance Corporate Governance Ownership & Control Pay
expanding field, current fragmentation and the relative Board Accounting
lack of regulation when compared to traditional NRSRO Corporate Behaviour Business Ethics
means comparison of scores can be difficult; studies Tax Transparency
show much lower correlation between ESG scores from Source: MSCI
different providers comparing to credit rating correlation
between the big three NRSRO.
25European Corporates│ESG (3)
Greenium
The momentum in ESG remains strong and many investors
are increasingly using ESG criteria to allocate capital.
Motivations for companies are clear to issue ESG bonds,
however for investors making accurate ESG assessments
and evaluating its specific impact on bond pricing isn't
straightforward, especially when ESG bonds rank pari-
passu to non-ESG bonds in an event of default.
This increased focus on ESG is welcome, but risk factors
that need to be considered are not necessarily unique and
it can be argued that these elements should already be
evaluated within fundamental credit analysis. Source: Bloomberg, MUFG
Interestingly when we look at issuer credit curves and
compare ESG vs non-ESG instruments it becomes
apparent that in many cases issuers with many green
bonds outstanding see little differentiation in terms of a
green premium for a ESG instrument. However the
relationship is much more pronounced when an issuer has
fewer ESG instruments outstanding, and when the positive
technical is enhanced due to sector specific considerations.
The relationship of green/non-green bonds from Daimler
and Iberdrola illustrate this phenomenon well. Daimler, an
automotive manufacturer within a sector that has high
environment sees a big greenium for its green instruments.
Whereas Iberdrola’s green / non-green bonds are much
more aligned in terms of spreads as the company has a
long standing focus on renewable energy which results in
less price differentiation in its secondary curve. Source: Bloomberg, MUFG
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