Investors who want to get more exposure to green assets in their portfolios are behind the drive for more for ESG equity issuance. Equity capital markets are an ideal place for them to get exposure as it allows them to participate in these deals in size.
“ESG was clearly front and foremost on people's minds at the beginning of the year, but perhaps took a step back while we were in crisis mode and balance sheet recovery mode,” said Carlton Nelson, co-head of Investec’s corporate broking business. “However, Covid has brought it very much back to the fore. This has become particularly clear as the environmental impacts of lockdowns and not travelling around the place are becoming clearly evident. I suspect that ESG-focused companies will be very much in demand when people are looking where to put their money.”
Investors have told GlobalCapital that funds are more focused on increasing the numbers of assets in their portfolio that comply with ESG standards and, according to one head of equity syndicate at a large global bank, are making reverse inquiries about names where there is an ESG angle.
This year, French power producer Neoen issued the first evergreen convertible bond in May and Danish renewable energy firm Ørsted reopened 2020 EMEA ECM in January with a block trade, attracting huge investor demand for the stock, including from dedicated ESG investors.
These are among the issuers that could return to the market along with Yangtze Power, the Chinese hydroelectric company which is exploring a London listing under the London-Shanghai Stock Connect scheme.
“In equities we haven’t seen dedicated ESG issuance like we have seen in the debt markets but I certainly don’t exclude it,” said a second syndicate head. “It is the natural next step to use equities to finance green projects.
“If you look at Yangtze Power, the Chinese hydroelectric company with dams across the Yangtze river, which is looking at doing a GDR listing in London, that is a deal that could get quite a bit of interest from ESG funds.”
Investor led
The demand for more ESG issuance is coming from investors, who have increasingly established rules about ESG compliance in their portfolio companies. This means that banks are considering not only which companies to bring to market to attract ESG dedicated funds, but also whether issuers who are not ESG compliant will be able to list.
“It is undeniable that there are an increasing number of investment funds which require issuers to have a certain level of ESG compliance,” said the second syndicate banker. “That is not a uniform level and it varies from sector to sector, but the bar keeps getting higher."
If you are not ESG-compliant, as an issuer, your universe of investors is a lot smaller and that is the biggest impact of this change in thinking. There are clearly some funds with a dedicated ESG mandate, but the bigger theme is not being excluded from the market.
However, because there are few defined standards around ESG, each fund treats the asset class differently. While this is easier with environmental factors, it is more difficult with governance and social — which has become far more of a concern for investors following Covid-19.
“The complexity of ESG for us has always been that investors are still defining what ESG means for them and what the benchmarking is to determine company compliance for the E, the S and the G,” said a senior ECM origination banker. “There isn’t a standard and each fund looks at it in their own way and how to define it.
“The easiest thing to define is the E, and we saw the first green convertible bond with Neoen this year and we will see more. The social aspect is now far more critical because of Covid-19. How companies have been treating their own employees and what they are doing to help society and the economic recovery is now a huge issue post-Covid.”