This is Dana Perkins and you're listening to Switched on the BNEF podcast. The ESG label is a term you've likely heard used before, and it's one that's designed to easily identify investments and companies that prioritize good environmental, social, and governance practices. However, recently, ESG investment strategies have come under fire from the right and the left of the
political spectrum. On one side, some US states have started passing anti ESG legislation citing fudiciary duty is the reason, and on the left there have been concerns over greenwashing. So do we need to rethink ESG the term because it's being used so ubiquitously and perhaps erroneously well. Senior associate on BNF's Sustainable Finance Team, Maya Godomer returned to the podcast today to dig into the ESG investment space and assess the claims levels at it. Together, we discuss
a range of topics. At the beginning, we go through some of the terminology for those new in the space. Then we go into the history of ESG, where it's come from, and then where it is now. What ESG means for different investment strategies and the green washing risks, followed by looking at these anti ESG bills and where they sit within the turbulent political landscape in the United States.
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at the very end of the show. But now let's hear from Maya and let's talk about ESG.
Hi.
Maya, Hi, Dana, thank you for joining the show again today. I'm ready to have you to be back on today's show. We're going to get into a bit around greenwashing and also a better around policy. So where there has been a bit of a backlash in terms of greenwashing, I think many of us would often actually associate that term with consumer goods, So you think about green washing and
marketing and things that aren't actually that environmentally friendly. But this most certainly applies to the financial services industry, and so we have a lot to discuss today. So again, maybe not everybody's gone through our back catalog and heard
every show you've done with me. So let's start on ESG and defining really what it is in terms of who's actually thinking about it, because ESG can take many forms and is being used as a term synonymously in some circumstances with corporate sustainability or in other circumstances with certain types of funds. So Maya, as the expert, please define ESG for us.
Thanks for this question, because it's a question we don't ask anymore. We just take it for granted and it's used everywhere. It's used as a word, and that's maybe my literature background, but it's three adjectives put together, so it's not a word. ESG is not a thing. ESG basically means unvironmental, social and governance, as you just said, but environmental social and governance what you know, like it can be used as ESG investing, ESG factors, ESG strategy
when we talk about a company. So it's really important to take a step back, and I think actually it's what the financial community is doing right now. So ESG is effectively these three words, and it usually was used to say ESG factors, So any kind of indicators that would when you look at a company, you're trying to
assess their environmental, social, and governance practices. And then more recently, I would say, I mean it was a longer time ago, but when it comes to investment practices, ESG investing really dates back from early nineteen hundreds, but it's been really booming ESG investing in the second half of the century, and more recently we've seen ESG investing really grow. And
what does it mean. It means for asset managers to take into account these environmental, social, and governance factor when they assess companies or any financial instrument in their investment process. So it means instead of looking just at the financial performance of a bond, of a loan, of any kind of investment they have, they also take into account environmental, social, and governance factors. Then ESG I think took a different meaning whether you're a retail investor, So what is a
retail investor? For my mom in the background, a retail investor is just someone that has a part of money like you and me, because we're putting money aside for our pensions or for our first mortgage and decide to
put that money into a fund. And I think for retail investors, so it means people with that money, ESG meant Okay, I'm going to put my money into a fund where I'm going to maximize my positive impact on the planet, on the society, or on the way a company is run, which is the governance issue, like I want more women in the company I invest in, like on the board of the companies. But I think for
asset managers it means actually something different. Black Rock is one of the largest asset manager in the world, and since they've started talking about ESG, it really boomed almost because if the first asset manager in the world dedicates
part of its strategies to ESG, what does it mean. Well, for them, it meant Okay, when I'm gonna do ESG investing, I'm gonna look on top now of the pure financial risk of a company, I'm also gonna look at mitigating and reducing my exposure to unvironmental, social, and governance risk. That's where the big difference is. It means that I'm not trying to maximize my positive impact on the world.
I'm just gonna try to minimize the potential environmental, social, and governance risk of my investments.
So you brought up some of this history of the ESG space and the fact that it's been with us for quite some time now. At the turn of the century, there was less emphasis on climate change, and so I imagined that that wasn't fully integrated into anyone's ESG strategy, but actually quite a bit of emphasis on the social part, so that the s in ESG, what would you say, the focuses now? And does one seem to show up more often in an asset manager's investment strategy than some of the others.
So asset managers have customers, so they had to be aligned with effectively the customer's demand. At the beginning of the twentieth century, the focus was really on the social component of ESG when you're talking about customers. It started with the religious movement putting money in funds where you had no exposure to gambling, no exposure to tobacco. Then in the nineteen sixties there was a whole movement about having non exposure to companies that were involving the apparthaid
in South Africa. So there were all this vision that stayed in some of the ESG funds today, which is like a basic ESG funds will just have an exclusionary
list of like gambling, tobacco, alcohol. Sometimes another topic that came up is also porn, like reducing exposure to these kind of companies, So that was the social element to it, and then progressively again from their retail investors' communities, so us the vision was to be like, okay, actually I also don't want to invest in companies that have a big role to play in climate change, and that came
with the two thousands. It was saying I don't want to invest in the big island gas companies, or I want at least to mitigate my exposures to this company. That's from the retail investor side. From the asset manager side, they're and good at the end of the day is to keep their clients happy, so ensure that these components are taken into account, but also maximize the profit for
their retail investors. And to maximize this profit, they were also like, you know what, actually social and environmental and governance matters actually represent a risk to our financial performance. Some investors are convinced that actually, if they want to respect their return duty that we call the fiduciary duty towards their end investors, they need to make sure that they're not investing in companies or any kind of investments
that bear too much climate risk. That means that in ten years time they won't return as much, or they're facing too much physical risk and stuff like that. So the social risk is tougher to prove. Governance risk is actually not that tough. Like when you hear all the story about Tesla or Nissan with Carlos gone, you can see that bad governance actually lead to lower profits. But for the social side it became more okay, we're going to have the gambling aspect, the weapon aspect, you know,
like all these kinds of things. But effectively it's more the environmental side now there is distilled because the demand from the retail investor and the driver of investment from the investor community are actually like meeting and are becoming compatible reducing exposure to environmental risk and lowering the exposure to heavier meeting sectors or like companies that have a big role to play in climate change.
Reducing exposure seems to be at the center of it because earlier on you made the definition between any SG screening process as opposed to impact investing, and one more definition really comes down to debt versus equities. So how does ESG investing strategies, how do they take different shape in both of those and also where is there the most tension as we get into the screenwashing part.
So I think the dead versus equity discussion is really interesting because you have two vision. You either have well a company that basically is bearing additional environmental risk and social risk or has a positive unronmental impact or social impact that's going to be analyzed at the equity level at the company level. So that's something that's going to be done by ESG analysts the same way that we
used to have like financial analyst. They go instead of looking at the cash flow and the debt to equity ratio, they're also going to look at like how many environmental controversies are they facing, how many of their plants are on areas of the world that are of high flood risk or extreme weather risk. So that's the company level.
The equitticide is totally related to the debt side, because the same way when you invest in a certain bond, you want to look at the debt to equity ratio of a company, how much cash flow they have available to do their payment. That's going to impact I would say the plane venuelea debt market, So any kind of bond, any kind of loan will also be in an ideal world analyzed through that lens of unvironmental, social, and governance issues.
Then there is a second part, which is a sustainable debt market, which is something we talked about in the past podcast, So if anyone wants to listen, there's going to be past podcast about that. But it's basically saying, okay, what if we were creating a market that signals that actually these funds are going to social projects green project Like as an investor, I know that my money is going to go toward actually financing the solution that's going
to mitigate climate change or mitigate social inequalities. And that's just sustainable debt mark, which we refer to as like labeled debt. And that's the second part. You still have that company and owsis hovering everything, but you also have the vision of what we call green bones social bondes, green loans, social loans that are going to go and finance specific social or green projects like solar power capacity
or hydro power capacity for instance. Greenwashing is everywhere there. Like, I mean, I've studied in business school not so long ago, we're talking seven eight years ago. I was never taught ESG, like how do you assess the environmental or social performance of an investment of an instrument? Like I wasn't told environmental studies.
What are you studying?
I studied my undergrad in philosophy and my master's in finance.
So you're studying masters in finance. You would expect that it would start coming up now.
Yeah, exactly. But I think it's just the new generation that is effectively educated in understanding those risks, assessing those risks, and it's two worlds meeting, right. It's like the science world. That's why I work for BNF because I can turn around and ask my colleague, what is a fuel cell technology? What is the added value in the transition? You know, like these kind of background that you need to have from an engineer. But I studied finance. I was never
taught what a good metals and mining strategy is. So when you have an investments product, you now need to add this second layer, which is the environmental and social and governance analysis of a given company. Governance's taught because I think the way a company is led has always been a matter for the financial community, but the social and environmental aspect, it's really hard to pinpoint what is actually material to the risk of a certain company.
Well, so then let's get into this definition of greenwashing. You've written a research note that's titled to stop greenwashing. We first need to agree on what it is and spoiler alert everyone, we don't end up defining it by the end of the research note because there isn't a definition right now, but you do highlight a number of the different areas where this friction does exist and where
there are attempts to make definitions. So let's say the taxonomy here in the you where they're actually trying to figure out, you know, what is in, what is out, and give it some borders. Let's start with what is your definition of greenwashing, and then let's go into what different organizations, multinational organizations and countries are looking at in their definition.
So basically, you're telling me that I didn't define grain washing in the note and you're now forcing me, putting me on the spot in a podcast to give a definition.
Okay, maybe that's not fair, so it's.
Okay, I can I can give it a temp. I think the definition around grainwashing is like polymorphic, it has like multifaceted. I think it can be. Also, the very important thing is that some companies and some asset managers and bank can actively greenwash, so pretend that something has like better environmental and social attribute than what they actually have, but they can also have like is it green washing.
There can also be something where there is a miscommunication about what are the actual attribute of a certain instruments, so we actually need to build that definition of green washing. There is the mislabeling of certain instruments pretending that a bond is green while actually it's going to find like natural gas, but effectively, depending on the region you're in, natural gas is actually a green alternative to heavy emitting.
Power and facilitates the transition to clean energy or maybe considered more of a transition bond. So there's a degree of perhaps that language around this space hasn't caught up to how many different layers of nuance that we ultimately really need and that we need more terms. And I know that complexity is something we are not lacking within
financial services or an ESG. So I am not suggesting that, but I am suggesting perhaps that putting the name on the tin as the term would say maybe is where we're falling down here.
I think so, and I think there is a problem of education. I think there is mislabeling and misleading around sustainability claims and sustainability risk. There is misunderstanding about Okay, if you invest in natural gas, these are the pros and cons of it. This is what your investment has in terms of environmental attribute. It allowed to move away from cold, but it's still not renewable, but it's also okay. There is then the risk of maybe your stranded assets,
like the financial community has not been completely transparent. I think there are two needs. There is a need for education both at the institutional investor level, the bank level as well so the fincial community level, but also the
retail investor level. It means that when we're choosing our pension, we should get access to all that data, all that information the same way we get access to the level of risk that we are exposing ourselves to when we're choosing one investment over another, we should have that level of transparency when it comes to the environmental attributes and
social attributes of a given investment. So it means when I choose my pension, I need to know, okay, what level of greenness is effectively my asset manager choosing for me. Are we going for dark green funds where we invest only in renewable energy projects or are we going to a fund that is actually betting on the transition? And it's up to then the final investor to get access to that transparency which we didn't have in the past.
It's getting there now, but for a very long time investors because there is also that mismatch that we talked at the beginning, you know about what the retail investor is expecting and what their institutional investor are giving them or asset manager or giving them. There was no transparency, But we're getting there.
This is ultimately a way of assessing companies. So how about the communication with the companies themselves who are ultimately putting together the reporting and trying to represent a lot of the things that they're doing in the best possible light as you would and the activities that they are involved in that are involved in the energy transition, let's say,
or any sort of decarbonization or sustainability focused measure. Is that communication between the finance communit and how they are assessing these companies really translating into how the companies themselves are thinking about their strategy or is it really just their way of assessing. But it's not impacting business in a direct way.
No, I think it's definitely having an impact on companies. I think that companies are much more aware that they need to communicate about their unvironmental and social performance on top of their financial performance. So through framework like TCFD, the Task Force on Climate Related Financial Disclosure or ISSB, the newly born ISSB which is the International Sustainability Standard Board, which comes from the IFORS Foundation. Like, it's really interesting
to see that relationship. We go from an accounting standard, pure financial accounting standard, to then thinking should actually sustainability also should have its own framework and reporting framework that is global. So the companies are now driven by that and also regulations. So I have a good story actually of a company in France that the taxonomy, the green taxonomy,
even before it was born. I reached out to that company that had done reporting and I was like, why are you doing a taxonomy reporting while it's not compulsory yet, And they were like, well, we think that actually the investor community and the financial community doesn't really understand our business model and they don't understand how green we are and actually what we do and our sustainability a tribute.
So we were discussing with them and engaging with them about how we could report on that, how we can report on our sustainability performance. And then when they reach out to their investors in particular sort of impact investors, they were like, well, you could use your own but the problem is that then it's not going to be comparable with other companies. So the best way for you to do this is why don't you use that standard that's going to be used by thousands of company in
Europe and potentially across the globe. And then for the investor community, it's going to be so much more transparent to see through your business model and to compare you against your peers. And even at the beginning, your taxonomy alignment is going to be quite poor, or it's not going to be as high as you imagined what you will have made that step. You know, taxonomy forces you in basically splitting your revenue generation, your capex and up
expending by business activities. So it allows you to go through your business and took the same language as your investors, the bank that are lending to you, the wider community, and it really helped them clarify what their business model is about, clarify what is their environmental value. You could do the same on the social side. It's a bit more complicated. We don't have as strong of a framework
to talk about that. But I think companies are realizing that actually they need to communicate on that they need to communicate on a standardized manner because otherwise they won't be understood. I think we're pasted, at least in Europe and probably in Asia. We're past this decade or two decades of like this super fluffy dr corporate sustainability reporting framework is g reporting, you know, where you have like a thousand pictures and not much data and not much content.
I think companies are really wanting to get it right. And I read a lot of reporting from companies and it's much more quantifiable. It's like, okay, maybe we're not doing this so right, but this is what we're doing, and these are the quantities about it, and this is how you can assess us. And that's actually really good to see because that's the beginning of then a trickle down effect to actually have more transparency when we invest, when we put our money.
So of the players that are actually trying to create definitions and give companies and those in the financial community rules by which to play, what would you say are the largest ones? We've already referenced the EU taxonomy. You also referenced ISSB.
Also can you taxonomy ISSBN, TCD Are there others? At the moment, we have so many frameworks it's almost complicated. We start like at the beginning with like there is TCFD, you have GRI, you have sas B, and bear with me because these are all abbreviation and I don't always remember what they mean, but these are all different reporting framework. You also have CDP the Climate Disclosure Program, So there are many reporting framework. I think what the market needs
right now is consensus. We need overarching frameworks. So the EU Taxonomy was the first green taxonomy that was really launched and became a mandatory reporting framework. Right now, it's impacting about five thousand companies or ten thousand companies. It's
quite small, and it's restrained to European companies. But there is a new regulation that we're awaiting called the Corporate Sustainability Reporting Directive in Europe, and that one will basically impact any company that has any listing in the European Union, whether you list a bond on a European exchange or in equity on the European Exchange, whether it's a primary or secondary listing you're in school. The figure that is given by the European Union is to be about fifty
thousand companies. Honestly, I don't know how they came up with this number, but we know it's going to be much larger. They are big unknown in the implementation of that directive because effectively there is a bit of questions around how the European Union can actually regulate companies that are not European, but if it happens, it's going to have a big impact. The other framework that I think is everyone is waiting for is the ISSB Framework, the
one we've mentioned before. The ISSB Framework is effectively supposed to become the International gold standard for sustainability reporting. And I think the CSRD, the framework we've just talked about in the European Union, has been put a bit on pose. We haven't heard too much about it, and maybe the reason we haven't heard too much about it is that they are waiting for the development of ISSB so that
they can put the two and two together. So I think these are going to be the main global standard. And then you have all a plectora of corporate sustainability reporting coming across the globe. India came up with one, Japan came up with one. TCFD has been one that has really been imposing itself globally, even if it's been mostly voluntary at the beginning, but now it's becoming mondatory
in certain jurisdiction. So I think these are the different grainwashing like I would say tools, perhaps, yeah, there are being counter tools, yeah, to to really like mitigate that risk at least when it comes to corporate sustainability reporting.
And you reference this very much as something that's globally being looked at, and you know, I think about Church Commissioners of England and I think about some of the different funds that you end up seeing being very early to the game here in Europe, and we had talked about the EU taxonomy, but increasingly this is a global discussion.
Are you seeing this focus on ESG strategies and investing strategies on ASAMA management side, but also on being more critical from a green washing standpoint really happening in Asia? Is it the same or significantly advanced in the last five years, last ten years? Has there been a tipping point?
Yes, totally. I think ESMA has made the tackling green washing one of their priorities of their upcoming regulatory developments, which is crazy. Like ESMA is a financial regulator, so that that means a lot, so we can brush the EU. You know, it's the UK is the same, Like there has been like a big development of ESG regulation in the UK through the FCN and the Central Bank, but it's spread across the globe Asia. Secondly, like so many
different countries are actively trying to tackle green washing. India has been really at the forefront of that, Japan, the Singapore Authority, Hong Kong Minitary Authority. There has been a development of numerous taxonomies, some of them really using what the EU has been developing. We've seen an Asian taxonomy being developed as well and pushed out. For now, the only taxonomy that is mondatory is the EU one. All the others are a voluntary framework that you can abide with.
China has developed their own. China even went to step further, which was like they developed the taxonomy and then after they worked with the EU to create what we call a common ground taxonomy, which is effectively a piece of work that shows what are the similarities and discrepancies between the EU and China taxonomies, which allow investors to really navigate these two. Yeah, Americas are behind. Actually Asia follows
the EU differently. I discovered while covering I cover a lot policy for BNEF sustainable finance regulations, and actually Asia has a way to do which is like a lot voluntary, but that is very followed by the market, which is very different from the European way of doing things, which is like regulation, regulation regulations. Asia is like, you know what, We're gonna put all these guidances and voluntary framework out there,
and then the market is like, hmm. If actually the government has put that guidance out there, it means they want us to follow it. So we're going to try to follow it. Japan has never made TCFD mondatory, yet it has the largest number of TCFD supporter in the world by far, like far, far far, we're taking hundreds of TCFD followers.
So high degrees of voluntary adoption.
Exactly and voluntary guidances coming from the government actually mean a lot for the region the Americas South America. Quite interestingly, a lot has happened, in particular in Brazil because actually under the Bols in our government, the central bank has got its independence back, and therefore the Central Bank of Brazil has pushed a lot of mandatory disclosure. But the North America everything is still on the pipeline. When it comes to ESGG disclosure, bring clarity about what is an
ESG fund. We're waiting for the sec proposals, which are both on the corporate sustainability side, but also on defining what is an impact phone, what is an ESG phone, what are the different shades of grain when it comes to funds and investment strategies. By still in the pipeline and its future is very uncertain actually, So.
You reference that there is a lower degree of compliance with frameworks in the United States. But let's go there in our conversation right now. When thinking about the United States and adoption at VSG, it has certainly been something that's been talked about in the policy sphere more recently, and that low level of adoption doesn't seem like it's going to be ending anytime soon, because there appears to have been number of different states who have pushed back
on ESG frameworks. What seemed to be the reasons and what would you say the future of ESG investing really looks like in the US in the near term.
That's almost the main question we're wondering ourselves. I just come back from the beneficumit in New York, and that was the question about the future of ESG there whatever the type of passage class we're talking about, and so where did it stay? There is this big like we're talking decades of discussion in the US about what is the role of an asset manager? And we're going back to Milton Friedman's theory of shareholder capitalism, right It's going back to this, which is like the role of a
company is to maximize their return for shareholders. It's not to have an environmental impact. It's not to have a social impact. That's the role of government. Moving on from there, we have this whole concept of what we call fiduciary duty, which is the duty of asset manager towards their customer, which is us putting our money into a fund, and their duty is to maximize the profit that we're making
through our investment. This being said, then when policymakers are looking at ESG, they're thinking, okay, it actually is ESG derailing asset managers from their fiduciary duty, from their main role, which is to maximize return for customers. So during the Trump administration, there has been this big bill that he wanted to pass which through the Department of Labor, where he wanted to basically prevents pension fund from taking into
consideration non pecuniary factors in their investment strategies. What are non pecuniary factors? And that was like, that's the legal term, but eff actually what he said out loud is like, I don't want pension fund to take into consideration ESG factors when they're having an investment strategy. The main goal should be financial return. And it was even if it looked like a financial legislation because also Let's not forget that the SEC their main role is to protect the
fiduciary duty of asset managers and regulate it. Even if it looked like a political and financial regulation, it was a Trump regulation and anti regulation antiesg regulation. It's not me saying it. We now have statement from Ron des centers from Donald Trump saying that actually they want to stop this ESD trend. So that was the Trump situation
that happened right before he lost his power. Biden came back, that law was overturned, it got overturned again, so came back, and then the first veto of the whole Biden presidency was to overturn again that bill and to allow pension funds to take into account non picking your refactor under the fiduciary duty because a retail investors can decide that actually unfru mental and social and governance factors are important for them.
So this is definitely drawing upon presidential powers. But at this point we've not seen anything really substantial come through and actually be ratified into law. That's why there's been so much discussion lately around the Inflation Reduction Act because it does have this kind of lasting asurety to it. One might think, so there is the presidential and then
the federal rules, but then there's the state level. What are we seeing in NSG space on a state by state basis, given that states can differ quite dramatically in terms of how they're viewing not only for the shary duty but also the role of importance of different environmental, social, or governance factors.
Yeah, like that's exactly what's at stake at the moment. Effectively, stuff is opening at the state level. We're seeing when we looked at it at the end of March twenty twenty three, and we're going to do this analysis again. At the end of March twenty twenty three, more than half of all US state had either passed or proposed an anti ESG bill at the state level. What is an anti ESG bill? So there are two types of
anti ESG bills. It's either a bill that prevents the state pension funds to be invested in funds that take into account non pecuniary factor so ESG factors. So that's the same as the doll attempt. That's what we're seeing for instance in Florida, And you have a second type of anti ESG bill, which is a boycott bill which effectively blacklists the local government from working with any bank or asset manager that has been supporting the ESG movement. So that's what we've seen in Texas.
So what if you are a retail investor actively looking for these sorts of funds, are they not going to be allowed to be invested in in these specific states.
If they work for the state and their pension fund is managed by the state, they won't be able to have access to ESG funds. However, if they go on their own and they go with their own pot of money, and I don't know, they work for a private company, then they'll be able to have access to these funds.
So it's essentially reducing choice from those who are working in the public sector. Yes, you mentioned one more thing that's kind of this overarching space, which it has to do with regulation and the role of regulatory bodies. So the SEC had previously proposed some different things associated with climate that have the potential to really change the way that ESG is employed in the United States. But that's kind of sitting in a holding pattern at the moment.
Where would you say that currently sits and what's the future of the SEC proposals.
So yes, indeed the SEC proposal could be a really good framework. There was a consultation period and we were awaiting the comeback of the SEC in April twenty twenty three with a final proposal that would go through vote. But actually it seems that they've been postponing the publication of the proposal to this autumn. That's what we're hearing, and the main reason is that there are a big disagreement about what should be in that proposal. So there
are two side. There is the Corporate Sustainability Reporting site that would include also Scope three reporting emission, so indirect emission reporting, which is the source of a lot of pushback. And then there is the part that is really on the investment management clarification and what is an ESD fund and a bit similar to the Sustainable Finance Disclosure regulation in Europe and the Sustainable Disclosure Regulation in the UK,
trying to recreate that in the US. So we're waiting for that if it comes in autumn, if the Scope three are included in the mondatory reporting. There's already several companies and Republican lawmakers that have announced that they would sue the SEC over the inclusion of Scope three emission. But then a month ago, then a bunch of NGOs, including WWF or the Sierra Club, I said, okay, if actually Scope three emissions are not included, we're also going
to sue the SEC, so that in the year. I think all of this just brings uncertainty to the market. I think that's the main problem. I think this polarization of the debate is really not moving the agenda forward. And I think what investors, companies and lenders currently need is clarity. So actually that's the problem wor.
Seeing staying in the United States and some of the trends are observing, because I think it's important to call out trends. There are these specific areas where there's butting of heads and different philosophical views on how one should be approaching these issues. But then there are things that we observe happening in the market, and so one is around sustainable debt. There's been a decrease in the amount of investment actually going into sustainable debt, and in particular
in the US. And my question actually really comes down to why do you think that there has been a decrease given that the number of green bonds coming out there typically are over subscribed, and you would think that that would then lead to more supply. These supply and demand dynamics seem to hold true across many parts of economics. So if they're oversubscribed yet there's less sustainable debt out there actually happening right now? Why is that happening in let's use the US as the case study.
Yeah, the US is a very interesting case study because they needed a lot of financing for the decarbonization. And it's true, sustainable debt issuance has been down as year across the board, apart from APEC, which is another good story about the trends that are happening across the globe. And that's the APACK issues were mostly driven by China. The reason why it's happening like that, and in the US in particular, let's not forget high interest rate fertility
bump into the FED rates. This has been making all financial markets, all capital markets postponing their issuance too. Later, we saw also like okay, sustainable that issues have been down in twenty twenty two compared to twenty twenty one, But twenty twenty one was a massive record here that was actually the outlier. And the reason why twenty twenty one was so high is because in twenty twenty, I don't know if you remember, there is something that happened. It's called the pandemic.
Yeah, maybe I was around for it, and we tend to forget.
But a lot of issues have postponed their sustainable that issues for any issuance from twenty twenty to twenty twenty one because we weren't too much uncertainty and therefore twenty twenty one was super high. Twenty twenty two massive decrease.
So these are the main macroeconomic reason. But the other reason is that in the US in particular, and the reason why I'm not so sure it's gonna go back to the twenty twenty levels and the growth that we saw in the past, is that anti ESG movement is really making companies fearful to be vocal about their commitment to the carbonization, to their commitments of the transition, at
least on my part of the market. I know that some of my colleagues covering the power market or power sector may have a different vision because and thanks to the IRA. But in the sustainable debt market, it's a bit more complicated. You don't want to end up on this blacklist, you know, like you don't want to be scrutinized by investors and other policy maker, So I think that's the reason. However, that was an optimistic view that I had from the New York summit, and that panel
people can rewatch if they want on demand. But some of the capital market participants at my panels mentioned that while they think that labeled debts, so these green social sustainability bonds and loans, may decrease in the future in the Americas and in the US in particular, they actually think that finance will become more sustainable, meaning that or any lending decision that is made, any bone that is underwritten environmental, social, and governance factor will be embedded in
the decision making process, and that for me would be a win. It means that, yeah, okay, we may not have as many green bones in the US as we had in the past. So it means that labeled market, where you know exactly where your funds are going, it may die, it may decrease, it may be only for a specific part of the market. However, when any company will come to the market and be like, I want
to raise that. Then on top of looking at its cash flow statement, on top of looking up if dead to equity ratio, environmental, social and governance factors will be enquired and there will be assessed. Okay, what are your like wate to water ratio, like how many environmental controversy are you into or did you face and how did you resolve them? You know, like, then maybe the paradigm
will change. That's the optimistic vision that I want to hold on to, because effectively, the labeled is just like signaling debt instrument ensuring that all your pot of money are going to something. But we may instead of having sustainable finance, we may have finance becoming more sustainable.
So you essentially are on a personal level very much rooting for finance becoming more sustainable, but finding its feet in this and trying to read greenwashing from the process, create transparency, provide education both to retail investors and to the asset management community and to the companies themselves that are actually putting out all of these different pieces of
information regarding their activities. So my question then comes back to the role of politics in all of this, And you brought this up very early on in the podcast around risk. Is risk being considered in these anti ESG bills that are going through different states, and the fact that the fudiciary duty in some respects actually does involve the integration of ESG factors because there are credible risks for the future of some of these investments.
That's a great question. The role of politician is central. Like I'm often asked why HESG has grown so much in a recent year in Europe, Why have we seen all these regulations. I mean, it never boils down to individuals, right, but I think there were some very strong signals sent
by the central bankers in Europe. People like Mark Carney at the Bank of England and Christine Lagarde at the European Central Bank have made it clear that actually environmental risk pose a question and they put economic stability at risk and that link was made very early on, and effectively that empowered them to then create some policy climate
regulation at the central bank level. So because here they're convinced that environmental risk are real, then there is this trickle down effect on the mandate of central banks, and then there is a trickle down effect on how much they can force the market to take into consideration these risk. In other part of the world, in Asia, some central
bankers are convinced about that. We talked about Brazil, the central Bank also has made actions to basically take into consideration on environmental risk and climate risk into their mandate. In the US, this is still being debated. It's still being debated if actually environmental factors are financially material, and when you look in between states, even at the proposal of that these anti ESG low When you look at Florida,
Florida cannot say that environmental risk are not real. They are facing floods, they are facing extreme weather, and actually, in the way the anti ESG bill is written, it doesn't prevent a set manager from taking into account financial environmental risk because they can't afford to. They have to
mitigate these risks. However, if you if you look at another state like Alaska that proposed an anti ESG bill, they consider any factors that is related to greenhouse gas emission to be a political or social factor, not a pecuniary factor. So there is this discrepancy even in between states that are not resolved at the government level, the federal level.
So clearly there's a lot of complexity here and friction within the SG space and how states, countries, companies, financial services players, investors are all thinking about this. So the question is do you think and surely sherely your opinion.
Do you think that ultimately there's going to be a radical rethink in this space and that the future of investing in ESG factors is going to look fundamentally different in let's say ten years, or are we going to continue to hobble along with different tweaks and tension.
So yes, I think ESG investing is really going to change. I think for now it was just adding a layer of unvironmental, social, and governance analysis on top of the real analysis. But I think the key component will be to find what we call the financial materiality, meaning a company that has lower climate risk will have a better
financial performance. And if this doesn't come from free markets, which is what the US and Canada and Northern America is convinced of, which is like, there's going to be a market based incentive, I think different actors will loby government to create that incentives. The IRA is a great
example of a North American way of creating that incentives. Okay, we're going to incentivize certain sectors that we think are key for the transition, and by incentivizing them through an industrial policy development, that's going to trickle down onto the
financial performance. The other way to do that is to have financial regulation or like carbon regulation, finding other ways to incentivize, either at the central bank level or the carbon level, to incentivize and create a financial materiality to a good environmental performance. Saying if you put a price on pollution, put a price on carbon, put a price on biodiversity loss. If we put a price on these things, then companies that are doing better or are doing good
for the environment will also do better financially. But these incentives need to be created from one way or another, and that's going to be the main task in the coming years.
Well, maya thank you very much for joining and explaining all of this complexity to us. Will certainly have you back to actually see the different things that are coming to pass and the changes that are impacting the way this market functions. Thank you for joining today.
Thank you so much, Dana.
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