ABN AMRO ESG Investor Survey: Key highlights
We summarise the results of our ESG Investor Survey. Compared to last years’ survey, respondents place lower relevance to the EU Taxonomy compared to ICMA principles. More investors are allowed to invest in Sustainability-Linked Bonds, though many find points for improvement in this market. When evaluating ESG instruments, investors have a holistic approach, and more respondents now focus now on decarbonization strategies.
55 investors participated in the second edition of the ABN AMRO ESG Investor Survey. Most respondents are portfolio managers from asset management firms located in North Western Europe.
Compared to last years’ survey, respondents seem to place lower relevance to the EU Taxonomy compared to ICMA principles.
Also compared to last years’ survey, more investors are allowed to invest in Sustainability-Linked Bonds (SLBs). However, there are still points for improvement in this market, as investors perceive the standard step-up coupon to not be material enough and find it hard to evaluate the ambitiousness of SLB KPIs.
When evaluating ESG instruments, investors have a holistic approach, and more respondents focus now on decarbonization strategies compared to last years’ results
Data comparability remains the biggest challenge when it comes to SFDR reporting requirements
On the 25th July, we published the second edition of our ESG Investor Survey results. The survey had a total of 39 questions in which 55 investors participated. The majority of the respondents are portfolio managers from asset management firms located in North-Western Europe. And most respondents either have an Article 8 or 9 fund (as per the Sustainable Finance Disclosure Regulation – or SFDR). From the investors that do have an Article 9 fund, the majority also focuses on the issuer ESG profile rather than the label of the bond.
Below, we highlight the main takeaways from the ESG Investor Survey.
More investors can now invest in SLBs
Green bonds continue to be the preferred flavour among ESG investors, followed by social and sustainability bonds. Nevertheless, the share of funds allowed to invest in sustainability-linked bonds (SLBs) has increased since last year. While in 2022, 21% of investors indicated that they were not allowed to invest in SLBs, this number decreased to 16% this year (see chart below on the left).
Furthermore, when looking at the criteria that investors judge most relevant when analysing ESG bonds, nearly 40% of the respondents said that they find all criteria (ESG strategy, ESG risk rating, impact of the bond’s use of proceeds/KPI and decarbonization pathway) to be equally relevant (see chart above on the right hand side). For the respondents that put more weight on one, there seems to be a slightly higher preference for the impact of bond’s use of proceeds (UoP) or KPIs. However, while the largest share of investors have selected this option as the most relevant, from a weighted average point of view, investors still seem mostly focused on the issuer’s ESG strategy and/or ESG rating. This is aligned with results of last year’s survey.
Furthermore, with regards the external standards used when assessing ESG instruments, the ICMA Green Bond Principles seem to be the most relevant for investors. This contrasts with last years’ top choice, the EU Taxonomy, which now ranks second as preferred external standard. The lower relevance of the EU Taxonomy could be due to the fact that investors became more aware of the challenges that issuers face in aligning with this standard.
Most investors apply some sort of preferential treatment towards ESG when conducting investment decisions
More than 60% of respondents do not differentiate between ESG-labelled bonds and non-ESG labelled bonds in their general (non-dedicated ESG) portfolio (see chart below, left). Within these, 28% of investors indicate that the ESG impact of the issuer is leading, rather than the ESG label of the bond. Overall, only 34% of investors seem to solely focus on the financial returns , while the remainder applying some sort of preferential treatment towards ESG.
When asked about the criteria they use to evaluate decarbonization pathways / targets of issuers, only 9% indicated that they do not have any criteria (see graph below on the right). This is a clear improvement since last year, when around 70% indicated they did not have criteria. These results are very encouraging because they signal that investors’ are increasingly more focused on a long-term analysis of issuers’ ESG credentials. Furthermore, the Science-Based Targets initiative (SBTi) is the most widely used criteria to evaluate issuers’ decarbonization pathways (58% of respondents). Nevertheless, nearly 40% of the investors indicated that they make use of the SBTi along with other criteria, such as issuer net zero commitments or their own internal assessment model.
Opaqueness and lack of comparability are the biggest challenges for the SLB market
Regarding the barriers to the SLB market, investors mention that it is still very hard to evaluate the ambitiousness of the SLB KPIs, which makes it hard for them to judge whether issuers are as strongly committed to ESG as they claim (see chart on the next page on the left hand side). The second most relevant barrier is the size of the financial penalty – investors believe that the step-up amount is not material enough. This corroborates with the responses to another question in the survey, which enquires whether the standard 25bp coupon step-up is still deemed as financially material – almost 50% of the investors considers that the size of the step-up should be higher. Nevertheless, investors are still not clear about what this amount should be, given that more than 50% of respondents does not have a preference when questioned about the preferred amount of coupon step-up.
On a side note, the ESG survey also shows that almost 40% of respondents considers the inclusion of scope 3 GHG emissions in the SLB Framework as being very important, and another 30% considers it important if scope 3 emissions represent at least 50% of total emissions. However, our analysis indicates that while around 80% of all euro IG SLBs are tied to carbon emission targets, only 18% of the issuers have included scope 3 emissions in their Framework. This indicates a clear mismatch between what investors are looking for and what issuers are delivering at the moment. Nevertheless, almost 30% of investors does not consider scope 3 emissions to be that relevant, given the lack of reliability of this measure. In line with the latter, almost 70% of respondents considers the inclusion of scope 3 emissions in the SLBs KPIs important. Of these, 33% considers it relevant only if scope 3 emissions represent at least 50% of total emissions.
Finally, as shown on the chart below on the right hand side, data comparability remains the biggest challenge when it comes to SFDR reporting requirements. 64% of the investors flagged that the data currently being provided by issuers is not very standardised and that does not allow the investor to properly compare the information across issuers. Also, 25% indicates that issuers are not providing data verified by a reliable third party, and 36% considers that there is still a significant lack of data availability, which requires investors to rely on internal assumptions. This suggests that more clarity from regulators could help both issuers and investors to apply the SFDR efficiently.
