Growing the ESG product suite

October 23 2019

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Growth of ESG Product Suite

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While sustainable finance for many people is still synonymous with green bonds, over recent years we've seen widespread innovation within the ESG financial product spectrum. Whether credit cards, leasing, mortgages, securitisation or equity, the financial markets around the globe are offering “greenified” versions of all these products, linking the green label to sustainability criteria that have to be met.

What is driving the greenification?   

There’s been a seismographic shift in the thinking across stakeholder groups that   ESG, and in particular sustainability, isn’t a nice-to-have but a MUST to tackle climate change and a key factor for achieving future growth and profitability.

Corporate treasurers have started applying a green treasury strategy, seeking to follow sustainability considerations when drafting corporate finance policies and choosing the financing tools - and a public bond is not necessarily the appropriate green instrument for each corporate.

Equally, institutional investors are looking to incorporate ESG criteria across their portfolios, not just those that manage senior bonds. The most tangible way of doing this is often through "flagship" holdings in instruments with a green/sustainability or social structural component.

Also, financial intermediaries are playing their role in broadening the ESG product range, feeling both regulatory and competitive pressure to grow the sustainable finance asset class. Hence a number of them are driving innovation of green investment products in their respective niche markets.

Green products support eco-friendly behaviours and the transition to low carbon economy

The greenification has gathered speed in the last three years, and today individuals and corporations looking to go green can pick and choose between green debt and investments products supporting their ambitions. Green credit cards, offering economic incentives for eco-friendly behaviours and green mortgages rewarding borrowers for energy efficiency improvements in their home are two examples of personal banking products going green.

In the corporate space, senior unsecured bonds remain the most common green bond format, but other bond types are catching up. While green securitisation stood firm as the second largest green bond format in 2018 with $24.6 billion of issuances, we also saw a surge in popularity for green covered bonds ($6 billion in 2018), MTNs, sukuk and green loans last year. Green loans, for example, jumped from $3.1 billion in 2017 to $5.1 billion in 2018.

The growth of this product suite is likely to boost demand for associated derivative instruments as market participants seek to manage ESG risks inherent in their portfolio and business operations.

Equally, the launch of numerous green bond and equity indices is not only helping ESG investors, in particular those that are new to the green market to take a first dip into green investments but hopefully will further whet their green appetite. 

The 4 A’s can guide ESG due diligence

As this expansion continues, ESG investors will need to stay vigilant about the credibility and transparency of new products and labels being introduced. As with green bonds, when conducting their due diligence ESG investors ought to focus on the 4 A's, which I introduced a few weeks back:   

  1. Level of Ambition: Is this business as usual or an issuer seeking to be industry leading in embracing the carbon transition?
  2. Alignment with the issuer's overall strategy: Is it a "side show" project or truly congruent with a company's overall operations? And are they setting the right incentives?
  3. “Additiveness” of the projects: What portion of proceeds is being used for new initiatives?
  4. Analysis offered on projects: What measurable environmental impact is expected?

The greenification product map

The below map gives an overview of the greenification that’s taking place. It shows that green is the new black of financial markets products!

ESG metrics & regulation
Green bonds
Industry participation

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