ESG Strategist - ABN AMRO ESG Investor Survey – 2H 2023

Below, we have highlighted our key take-aways:

• Data quality is seen by investors as the biggest barrier harming the growth of the green bond market. Also for their own disclosures, data quality acts as an important obstacle for the efficient implementation of the SFDR.

• Compared to last year’s survey, respondents seem to place lower relevance to the EU Taxonomy compared to the ICMA Principles. This could be due to several reasons, including potentially the fact that transitional activities might have undermined the status of the EU Taxonomy for green investors.

• Also compared to last year’s survey, more investors are allowed to invest in Sustainability-Linked Bonds (SLBs). However, there are still several points for improvement in this market, as investors want to see more inclusion of scope 3 in GHG emission targets, a larger level of coupon step-ups and more comparability. The majority of respondents also say that they still find it very hard to evaluate the ambitiousness of SLB KPIs, which comes despite the fact that almost all of these instruments receive a Second-Party Opinion (SPO) from an independent third-party. This brings into question to what extent investors find these (SPO) assessments truly reliable, and what the true value-added of an SPO for an SLB is.

• Although the standard practice is for issuers to report on a portfolio basis, respondents indicated that they have a strong preference for bond-by-bond reports.

• When evaluating ESG instruments, investors have a holistic approach, and more respondents focus now on decarbonization strategies compared to last year’s survey.

• Most investors give preferential treatment to the ESG angle, rather than fully focus on financial returns. Overall, our survey shows that investors do not necessarily see ESG as a factor which excludes returns, but rather as a complementary or additional factor that could drive financial return.

Contents

• ESG Investor profile: The majority of the respondents are portfolio managers from asset management firms located in North-Western Europe. Most respondents have either an Article 8 or 9 fund (as per SFDR).

• Investment universe: More investors are now allowed to invest in Sustainability-Linked Bonds (SLBs) compared to last year’s survey. The primary market seems to be key to source ESG investments. Compared to last year’s survey, investors seem to shift focus towards corporates for “use of proceeds” ESG bonds. Corporates in transition remain the preferred sector for SLB issuance, according to respondents. SLBs are preferred over transition bonds for companies in transition.

• Investor behaviour: Most ESG investors seem to give preferential treatment to the ESG angle, rather than fully focus on financial returns. On the other hand, the majority of respondents see ESG as a source of alpha/beta or believe that ESG will outperform in the long-term. Hence, these investors do not necessarily feel that they sacrifice returns in order to achieve ESG impact.

• Investment screening: Contrary to last year’s survey, the majority of ESG investors prioritize the ICMA Principles when assessing ESG bonds, rather than the EU Taxonomy. Investors still take a holistic approach when analysing ESG instruments, including a focus on ESG strategy. With regards to respondents focus on decarbonization pathways, the Science-Based Targets initiative (SBTi) remains the most widely used criteria. Only a small minority does not have criteria to evaluate decarbonization strategies. Our survey also shows that investors still seem reluctant to invest in ESG instruments from subordinated debt and securitizations.

• Barriers for the market: Data quality is seen by respondents as the main issue preventing the growth of the green bond market. For SLBs, opaqueness (how hard it is to evaluate the ambitiousness of targets) and lack of comparability remain the biggest issues.

• SLBs: Investors seem open to other payment structures, besides the widely used coupon-step. While there is still no big preference in terms of the amount of coupon step-ups, the “standard 25bps” seems to be over used given the rising rates environment. SLB investors place a large importance in the inclusion of scope 3 emissions in either SLB Frameworks or (GHG-linked) KPIs. There does not seem to be a particular preference regarding the observation date of targets.

• Reporting: The majority of respondents does not have a particular preference for a preferred Second Party Opinion (SPO) provider. For those that have a preference, Sustainalytics remains the top choice. Investors seem to more and more prefer reporting on a bond-by-bond basis, albeit that being in contrast with current market practice. There is still no strong preference when it comes to lookback periods.

• Greeniums: Investors expect greeniums to continue, albeit without much change compared to current levels. The majority of respondents doesn’t seem to have a fixed maximum greenium they are willing to accept. When assessing greeniums, investors are more focused on the issuer’s ESG credentials rather than the sector.

• Regulation: The biggest challenge around the SFDR implementation is data quality. Most investors are not yet sure if and how they will implement the EU GBS requirements internally.

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